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Can you climb the income ladder?

By Judy Martel · Bankrate.com
Thursday, November 14, 2013
Posted: 4 pm ET

Most people who believe in the American Dream are convinced that hard work and a will to succeed are the stepping stones to a better life.

But a study by Pew Charitable Trusts splashes some cold water on the dream. Although 40 percent of Americans believe hard work alone can catapult a poor person to riches, 43 percent of those raised in the bottom quintile of the income ladder stayed there a generation later and 70 percent never reached the middle rung. A minuscule 4 percent succeed in the "rags to riches story" by attaining the top income levels.

The study collected data from 1968 to 2009, following households over time. Researchers compared adults in their prime working years with those of their parents at the same point in their lives, according to Diana Elliott, Pew's research officer on economic mobility.

Elliott says that a few factors stood out in the study as predictors of economic mobility, including college education, race and households where at least two people worked.

In fact, a college degree is the largest predictor of who will overcome poverty. While only 7 percent of those raised at the bottom quintile received a college degree, 86 percent of them moved up the income ladder as a result, compared to 55 percent of those who didn't graduate.


Dual-earner households were the next most likely group to progress from the bottom quintile, with 84 percent of them moving up from the bottom and 50 percent of that group making it to at least the middle rung. Among single-earner households, 49 percent made it out of the bottom, and 24 percent of them made it to at least the middle.

Whites and those who did not experience a period of unemployment also fared better. Whites were 50 percent more likely to leave the bottom quintile than blacks were, according to the study.

You need money to make money

Another factor in income mobility, which seems counterintuitive if you are at the bottom of the ladder, is wealth in the form of home equity or savings. "A cushion of savings and wealth is leverage for future economic mobility and protection from downside," Elliott says.

But, while having $1,000 in the bank doesn't directly translate to a higher income, she adds, "You can use it to pay for additional education to get a better job, which can lead to higher income. It's a virtuous cycle of economic mobility."

The study identifies financial capital as a key mobility factor and notes that, although the majority of Americans earn more income than their parents, only half exceed their parents' wealth. Even more troubling, nearly 40 percent lack sufficient savings to replace three weeks' of their income. The result is that, despite higher incomes than their parents, they are economically less secure.

"This underscores the fact that financial security and economic mobility really go hand in hand," says Elliott.

It's the age-old principal that you need money to make money. And Lisa Leonard, vice president and wealth manager at True North Advisors in Dallas, says her wealthier clients understand that very well.

"Most people do have areas where they can trim the fat a little and save more," she says. Keeping a budget to reflect spending is a good way to project how overspending affects your long-term lifestyle, and most people understand that intellectually, she adds. "The problem comes from understanding it at an emotional level. That's where people get into trouble."

"Rags to riches" is a rare occurrence

We've all heard stories about exceptional people who succeeded where others might fail -- the entrepreneurs who spend a lifetime building wealth and die as multimillionaires, for example. Many of them lack a college degree and are the only earner in their household, but they share certain traits, says Leonard. "They are willing to take risk; you see it again and again."

But while they might go into debt to start a business they're passionate about, their decisions aren't purely emotional. "They are very good about doing due diligence on the front end," she says. "They use more data when making decisions, instead of just relying on a good idea."

Keep up with your wealth and mortgages and follow me on Twitter: @JudyMartel.

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