Whether it’s the chicken or the egg, there’s no doubt that savings is an essential ingredient in upward mobility, as shown by a Pew Charitable Trusts study released Thursday.
Just as a host of factors can contribute to a fall, a series of interrelated factors can also largely determine a family’s socioeconomic rise: namely, education, dual incomes, continuous employment and savings.
“Forty percent of Americans think it is common for a person in the U.S. to start poor, work hard and become rich,” said Diana Elliott, the research officer for economic mobility at Pew. “But that rags to riches story is more often found in Hollywood than in reality. In fact, 43% of Americans raised at the bottom of the income ladder remain stuck there as adults, and 70% percent never even make it to the middle.”
But among the many factors that are associated with upward mobility, several of them have one commonality: their ability to allow a household to build wealth. Before we dive into that connection, let’s explore these factors
Top Factors Associated With Upward Mobility
According to the study, the characteristics most often correlated with upward mobility are having a college degree, being in a dual-income family, race and not experiencing unemployment, as shown here (click to enlarge):
In fact, college graduates were more than five times as likely as non-graduates to leave the bottom quintile, and 2.5 times more likely than non-graduates to reach at least the middle quintile. Similarly, dual earner families were 3.4 times as likely as single earner families to leave the bottom quintile and 2.8 times as likely to reach at least the middle quintile as single families.
Role of Wealth-Building
Leaving race, which one cannot control, aside, the other big factors — a college degree, dual incomes and sustained employment — all have this in common: they allow a household to build wealth.
And higher savings was significantly correlated with upward mobility in the study, which used data from a longitudinal study of families from 1968 to 2009.
“So we’ve seen hints in our previous research that those who are upwardly mobile are also more financially secure,” said Elliott. “But this research really shows the magnitude of the difference between savings and wealth in those who move up vs. those who don’t.”
According to the report, “Those who left the bottom of the income ladder had 6 times higher median liquid savings, 8 times higher median wealth, and 21 times higher median home equity than did those who remained stuck at the bottom.” (Liquid savings refers to an individual’s checking and savings accounts, farms and other businesses, real estate, stocks, vehicles, and other assets, while wealth includes liquid savings and home equity minus debt.)
This was because, “Those who do leave the bottom are also more economically secure, having a bigger cushion of to fall back on in hard times and to invest in their future economic security and mobility,” said Elliott.
For example, families with savings could invest in education and job training that could in turn create more job security and boost one’s income; and that in turn allows the family to save and wisely invest more, creating an upward spiral.