I read an interesting article, “A high IQ is no financial guarantee”, on MSN Money today. There were a couple of key takeaways I got from the article, but you should read it before continuing. The author, Karen Aho, points out that you can’t draw any broad conclusions from the study… but I will! The study focused on baby boomers, since they can, for the most part, be looked at retrospectively in terms of savings and income.
My key takeaways:
Saving money has nothing to do with IQ: “[people] with average and low IQs were just as good at saving money as those with high IQs.”
Earning money does have something to do with IQ: “subjects earned an average of $234 to $616 more per year for each added IQ point, meaning someone with an IQ of 120 (top 10%) made $4,680 to $12,320 more than those crowded in the middle of the bell curve with an IQ of about 100.”
Earning money has nothing to do with saving money: While those with above-average IQs were three times more likely to have a high income as those with below-average IQs, they were only 1.2 times more likely to have a high net worth.
Nobody is really good at saving money: No IQ group had built up "a significant financial cushion." The median baby boomer’s wealth equaled 18.6 months of income, while the highest-scoring group, those with an IQ of 125 or above, had little more than two years of income saved.
Money is not the only measurement of wealth: The colleagues of the study’s author, university professors, told him “We are incredibly ‘wealthy.’ We don’t work many hours, and we get to work on whatever projects we want [despite lower salaries and net worth]."
So to address each point:
Saving money has nothing to do with IQ
People are often confused about what IQ really means. From Wikipedia: An intelligence quotient or IQ is a score derived from one of several different standardized tests attempting to measure intelligence. IQ tests are used as predictors of educational achievement. Note that these tests are used as predictors of educational achievement. They do not, for example, test discipline, or creative ability or personality. Someone who has a low IQ but is highly disciplined, for example, might be a better student of engineering or mathematics than someone with a high IQ who doesn’t focus. Someone who has a great knack for spotting real estate deals though intuition might not have done well in biology class.
Saving money is more about temperament than educational intelligence. Since our education here in the US pays absolutely no attention to financial education, a high IQ might even work against financial education. People with high IQs might continue their education longer, deferring their entrance into the real world where they have to learn about managing their finances. I didn’t get my first real job until I finished my graduate degree at 24. People I know who didn’t go on to college had already been in the workplace for six years, dealing with all that entails.
Earning money does have something to do with IQ
Study after study shows that you can earn more money with a college education, which you are more likely to obtain if you have a higher IQ. Corporations and other large employers will tend to pay more to a college graduate, meaning earning potential is higher if your IQ is higher. I am not sure this is such a great thing. Are you better off working at a fixed salary as a manager for The Corporation with 5% raises over the course of your life, or being this guy who didn’t manage to graduate from college, but had a clever idea about selling software?
Earning money has nothing to do with saving money
I earn a lot of money. I spend a lot of money. Because I live in the most expensive part of America, my above-average salary gets swept away pretty quickly by my way-above-average-costs. I don’t spend unnecessarily, although as with everyone I could cut back in certain areas. But my ability to save is a function of my efforts to cut back on expenses where I can, not due to the fact that I make a huge salary. I maxed out my 401(k) deductions (which is a set amount, not a percentage of earnings) 15 years ago when I was living in a much cheaper city, making about 1/5th of what I make today. So I saved just as much when I was earning much less. That has more to do with my interest in saving than it does with my earning ability, because as a percentage of my overall income my savings rate is drastically lower than it was – my savings rate has declined as my income has increased.
Nobody is really good at saving money
This goes without saying, almost. The US has a terrible personal savings rate. I think the statistics bear out that although certain individuals are better than others, as a whole our nation is not good at saving money, regardless of one’s social status, intelligence, hair color or favorite TV show.
Money is not the only measurement of wealth
I don’t think this point can be repeated enough. There are other measurements. Is someone who works 100 hour weeks his whole life until he drops dead of a heart attack at 60 truly wealthy? Is a painter who loves to paint but can’t afford the newest iPhone really poor? These are philosophical questions, of course. But a person who has a pension guaranteed for life is in many ways wealthier than a person who has all of their savings for retirement in the stock market. The pension, of course, can go bust, but assuming it doesn’t I’d rather have a small guaranteed payment rather than a wildly fluctuating amount. Peace of mind is priceless, isn’t it?
It’s a good article. I don’t think there’s anything surprising there – street smarts have trumped book smarts plenty of times throughout American history – but it’s interesting to see those study results in one place. There’s hope for all of us!