#24 Income Inequality: Shrink The Gap

According to an economist on Attn:, the biggest companies in America have tripled their profits in the last 30 years. 

But in the last 30 years, wages have only increased by 9%.

The profits of companies are coming at the expense of employee wages.

300% vs 9%. That's the income inequality that has happened in the US. In Canada, it's not much better with wage growth of 10-15% in the last 30 years.

Instead of complaining about how wages are not growing how can we solve this problem ourselves?

It's really hard to go to your company and say I want a 5% wage increase every year, especially if you are not getting a promotion. After a few years, you'll be making way more than the other people in the company doing the same job and they will lay you off and hire someone for less money. 

*Not necessarily the case with all jobs, but if you take the average job, this is what would happen.

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Instead of running away from the problem, maybe running towards it is the solution.

As average people, making average incomes the best way to solve our personal income inequality is to find a way to get a piece of the profits of these big companies?

Fortunately, there is an easily accessible system to do just that. It's a two-step process.

STEP 1: Don't spend all your wage income

STEP 2: Use those savings to buy stocks (shares of public companies)

These big companies, like Apple, Amazon, Google, Facebook, Banks, Telecom companies (like Rogers, Bell, Verizon, AT&T), they are all selling part of there companies to the general public.

When you buy their stocks, you can get a share of those profits that are growing way faster than your income.

Voila! You are now on the other side of the inequality trend. 

If you keep saving and buying stocks, you will slowly close the gap between the inequality that big companies enjoy and the low wages of the average person.

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Think of it this way.

You go to work and collect 100 coins. You can spend 100 coins.

If you keep working, next year you might collect 101 coins. 

Let's say, instead of spending all of your 100 coins you set aside 20 coins to buy shares of public companies (stocks).

Year 2 will look something like this:

Work and collect: 101 coins. PLUS 20 coins in stocks will give you 1 coin in profit.

Instead of increasing your income by 1 coin, you increased it by 2 coins.

You are benefiting from the faster-growing profits of big companies. Only 20% of your income invested in these big companies can match the growth in your wages every year.

 

In Canada, you can invest 18% of your gross wage income into an RRSP and pay ZERO tax on that money. 

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But how do you buy these companies when you don't have the time or knowledge to pick the right ones?

You have a few options:

1. Go to your bank and talk with a financial advisor who can help you buy groups of these companies (mutual funds).

When you buy a mutual fund you, you are getting a piece of a pie that is made up usually of 100-300+ big companies. 

By buying a smaller amount of many companies you are more likely to get an average result, but you are less likely to get a below average result.

*highly recommended for people completely new to investing*

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2. Go to your bank's website and open a direct investing account. Fill out all the forms to open your account. Then buy ETFs.

ETFs are similar to mutual funds but have fewer fees because you are doing more of the work yourself.

This method is a little more involved. If you are not prepared to be involved, it's ok to pay some fees to your financial advisor to handle it for you.

*recommended for people who have invested with a financial advisor for a few years and understand investing at least to an average level*

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3. Go to your bank's website and open a direct investing account. Fill out all the forms to open your account. Then buy stocks. This is the most involved option. You are buying individual companies instead of groups of companies. This has the most potential for below and above average results. 

*recommended for people who have invested in ETFs for a few years and have some extra time to research the qualities of individual companies*

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My investment career started in this order from 1 to 3. I was with a financial advisor for 7 years before I started investing in ETFs and after studying stock market finance in school, I started investing in individual companies.

It's now been 13 years since I started investing, I have graduated from investing in mutual funds, but I still own ETFs as part of my portfolio of investments along with a few individual companies I have done my research on.

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Shrink the inequality gap. Save money and invest in big companies that are benefiting from your wage stagnation. Take your share of the profits.

 

Save Money Retire Early is written by Jon Lo, a barely 30 something change optimist, and personal finance guy. I believe anyone can be rich or poor, it's what you save that makes the difference.

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