Life is better than it was 50 years ago, but there are still people that suffer. What are they missing?
The Matthew Effect is a popular saying simplified as: the rich get richer, while the poor get poorer. To break this cycle, disadvantaged communities need to band together in multigenerational homes. In doing so, they can benefit from pooling resources, sharing costs and investment risks, and adopting a generational planning mindset.
What Causes The Matthew Effect?
On a narrow timeline the Matthew Effect is true, but if you look back over the last 50 years, life most certainly is better now than it was then.
In general, the quality of life has improved for society as a whole. We have better medicine, better access to information, and better opportunities for personal growth. As a consequence, it’s better to live today than in the past. So why is there a discrepancy in the feeling of every day people?
It boils down to this: life is better now because of societal level benefits that everyone receives but when we compare individuals, the results diverge. Aside from the causes creating the newly forming class divide, it’s a challenge of both relativistic comparison and of accumulated advantage. Ie: When you have less than your rich neighbor, it’s gonna seem as though he gets more rich while you struggle along paycheck to paycheck.
Accumulated Advantage – It Pays To Start With More
The country you’re born in and your family’s financial circumstances when you start life greatly impacts your longterm success. That’s because accumulated advantage is a function of compound interest. Each subsequent generation that follows you will compound on the benefits from the preceding generation.
The more of an advantage you begin life with and the more frequently you add to that starting position, the greater the compound value will be. Starting from a position of financial strength empowers long term decision making. You can afford to defer financial results and incur losses when pursuing high value opportunities. Whereas living paycheck to paycheck forces short term choices at the expense of long term gains.
Comparing decisions based on generational accumulated advantage to short term disadvantaged decision making is like comparing compound interest to simple interest.
The velocity of change is considerably different. And this is what creates the feeling that the The Matthew Effect is real.
Our societal level educational systems don’t train students to seek long term accumulated advantage. We don’t have a standardized curriculum of generational wealth building strategies. Instead, it falls on the individual to take standard skills and rise to the top. A frequently ineffective trial by fire.
The Most Important Attributes of Accumulated Advantage
Accumulated Advantage is best thought of as the effect produced from compound interest. ie: each generational improvement adds to the principle of all previous societal advances with the addition of all past advances.
|=||initial principal balance|
|=||number of times interest applied per time period|
|=||number of time periods elapsed|
So if you consider accumulate advantage is like compound interest, you can use the formula to figure out ways to improve life. Your starting point is therefore the major coefficient in determining your outcome. As previously said, the larger your starting point is the better off you’ll be. But you can also increase your principle with greater speed by manipulating the other elements of the equation.
Start Earlier and Increase Frequency of Contribution
Earning money earlier, saving earlier, building credit earlier, and learning earlier are all important choices that impact the ability for a person to accumulate advantage. The earlier you contribute to your intellectual and monetary principle, the greater the value of compounding you will receive over your lifetime.
Although there are complex child labor laws around the world, it may be important to adjust them for information age work. There is considerably less danger to a worker doing desk work than working in a factory. It is also becoming more common for young people to take advantage of online opportunities.
The Challenge of Long Term Thinking In a Paycheck to Paycheck Environment
But there is a simple and unavoidable truth: you can’t think too much about compounding interest if you’re trying to make ends meet. How are you going to keep the power on, where is the next meal going to come from, and how do you build up a rainy day fund?
In this situation, going to college and forgoing 4 years of income while adding $100,000 in debt is frequently not practical. Especially, if the individual doesn’t have an actionable plan for monetizing the college degree. The point is, if you don’t know what you want to do with your life then going to college can be a massive lifelong setback.
Instead, more people should consider operating from a multigenerational household to bypass traditional problems of living paycheck to paycheck.
Accumulated Advantage Requires Repositioning Mindsets & Value Systems
But what does multigenerational living have to do with the Matthew effect? Looking on a globalized basis, it’s still true that most people would rather live today than 50 years ago. Despite that, there is still a sense that the Matthew Effect of Accumulated advantage is more pervasive in American and Western cultures. What might be the cause of this mindset variance?
America is still known as the land of opportunity but it’s also become an instant gratification culture. Anyone can make it big in their lifetime in America and for many cultures, this is a rarity. First time visitors still get that feeling of excitement when they visit New York City where anything feels possible.
In contrast with Western individualistic mindsets, Asian cultures have a pragmatic generational focus. Focusing on improving each subsequent generation as much as possible by increasing the following generations starting point.
Examples of this generational worldview are captured by Softbanks, Mayoshi-Son and his 300-year plan and China’s strategic Belt and Road Initiative.
Unlike much of Western culture, Asian culture still centers around multigenerational households. It’s typical that as many as 3 generations live under one roof on a consistent basis. This allows for the pooling of resources and frequently prioritizes family goals over individual goals.
While multigenerational households have pros and cons they allow for effective generational planning.
Multigenerational Homes Are Critical To Breaking The Cycle
Reduce and Share Costs
So what are the traditionally disadvantaged to do? Take a page out of Asian culture by reducing costs and increasing resources while living communally in multigenerational homes. These homes provide resiliency to break the paycheck to paycheck cycle especially during challenging and unpredictable times like COVID-19.
As an example, shopping on a wholesale basis at the grocery store to get more food at lower cost.
Increase Starting Principle
Living in multigenerational homes supports increasing the families “principle” savings, creating safety nets and ultimately allowing for investment opportunities. Multiple generations of earners share the benefits of reduced costs of living and can stretch their resources farther. It also permits communal savings with more frequent contributions of income.
By increasing the frequency of contribution to the families principle capital, the family position is able to accelerate the value of compounding growth over time.
The importance of compounding in both positive and negative directions is one of the most critical lessons needed to improve quality of life. It’s at the core principle of accumulating advantage or disadvantage and it impacts the velocity with which that phenomenon impacts a person’s life.
Share Risks Across Multiple Incomes
If you make a mistake in the direction of your life, you cost yourself time, money, and set yourself at a disadvantage to your peers ability to accumulate wealth faster than you.
This is especially true as the transition from high school to college becomes a more questionable decision. Students now take on education debt, enter crowded job markets and are stuck with massive amounts of compounding debt.
A lack of understanding of compounding interest over time is a critical breakdown in the decision making process for students contemplating college. Skipping four years of full time earning and adding considerable debt for the privilege can have massive implications for expanding the class divide.
This is a major problem with our standardized education process. We have students go through high-school thinking that going straight to college is the best decision a person can make. Without considering the risk to capital accumulation. We simply don’t teach them the financial literacy to make that decision from an informed point of view.
Despite these misgivings on whether college makes sense consider the following:
The individual contemplating $100,000 of debt vs the multigenerational family making an investment to increase a members earning power. The risk profiles are very different. Living with multiple generations also empowers individuals to approach higher education debt from a different financial position.
Accumulated Advantage – The Takeaway
Living together in multigenerational homes allows for the pooling of resources and reduction of costs. It allows for long term strategic planning to support asymmetric investments in new generations that would otherwise be impossible. By making these investments, families are adding to the principle achievements of previous generations. Pooling resources and risk builds a foundation for future opportunities, while diversifying bread winner jobs to be resilient in changing future economies.
It might not be the answer for everyone, but it could work for many.
Every Monday, I send out The Sovereign Individual newsletter. A weekly newsletter that includes insights, tools, and mental models to navigate life in an immersive digital age. Subscribe below.
4 thoughts on “Building Generational Wealth with Accumulated Advantage”