Why Smart People are No Better Off Financially

When I wrote Intelligence is Linked to Income, but Not to Wealth last week I linked to an article that gave us some facts about wealth, intelligence, and income, but didn't really give us any of the reasons why there was a relationship between intelligence and income but not intelligence and wealth. But Laura Rowley has some thoughts on why this happens. In Why Smart People Make Bad Financial Moves, she details several of the key issues associated with this information.

I'll take them one-by-one with commentary after each point. We'll start with the relationship between income and intelligence:

Zagorsky found that each point increase in IQ test scores raised income by between $234 and $616 per year. Thus someone with an IQ of 120, ranking in the top 10 percent of IQ distribution, would make $4,680 to $12,320 more than someone with an average score of 100.

So, the smarter you are (on average), the more you make. This seems to make sense -- at least in theory those extra brains are useful to more people, businesses, etc. and thus worth more. But, as we all know, income is not the same as net worth. And someone who makes a boatload of money and spends a boatload plus $1 is going backwards financially.

And this is exactly what is happening:

But their superior minds and salaries didn't give them greater net worth -- or shield them from financial woes. Among people with an IQ of 120 or above, more than 6 percent maxed out credit cards; almost 12 percent missed a payment in the past five years; and 9 percent declared bankruptcy.

So smart people make more on average but they also spend more on average, so they're no better off than those who earn less.

Which begs the question: what are the key factors that make someone wealthy regardless of their income? Rowley suggests a few theories on how people with average IQ scores end up rich:

• They make their own rules.
• They get knocked down, but they get up again.
• They succeed through social intelligence.
• They may take more risks, and consequently reap more rewards.

My personal theory is that they simply "do the basics." You know, the simple but effective steps that anyone can take to become wealthy. Now why some people can do these and others don't (or can't) is anyone's guess. Most likely, it is tied to self-control, but no one wants to hear that explanation.

Rowley takes a stab at this issue with a few theories on why people with high IQ scores end up struggling financially:

• Sometimes a really bright person develops a gigantic sense of entitlement.
• They think they'll find "the big idea" that others overlook.
• They may run with a fast crowd and live beyond their means.

Bingo! They live beyond their means. In other words, they can't control their spending or they don't have enough self-control.

Isn't that what I just said? ;-)

For more posts that shed some additional light on this issue, see these links:

• How to Get Rich in Three Easy Steps

• My Best Financial Advice: Spend Less than You Earn

• Poverty to Prosperity

Comments

[Minimum Wage]

Sorry to be ornery, but I disagree that there are "simple and effective steps" a boomer with student loan debt earning minimum wage can take to become wealthy. Among other things, their age now works against them at least two ways.

[Todd]

I have to disagree. Not only is the notion that income and net worth aren't strongly correlated counterintuitive, it's simply false.

Indeed, as the most recent Federal Reserve Survey of Consumer Finances indicates, there is a direct linear relationship between the two:

Household Income Average Net Worth

Less than $10,000 $4,800
$10,000 - $24,999 $30,000
$25,000 - $49,999 $54,900
$50,000 - $99,999 $121,100
$100,000 and more $485,900

Thus, IQ does correlate strongly with net worth. (The recent study from the fellow at Ohio State reached the opposite conclusion by removing all the indicia of high intelligence in his study (e.g., education).)

But there is more that is work here, and that's age. For example, a newly-minted attorney or doctor might make a good income, but also be saddled with huge debt. He will thus have a high income and a negative net worth. But in 20 years, the income will be higher still and the debt paid off. As a result, he'll have both high income and high net worth.

[magwa]

I have an IQ well over 120, so I must ask on this stat:
Among people with an IQ of 120 or above, more than 6 percent maxed out credit cards; almost 12 percent missed a payment in the past five years; and 9 percent declared bankruptcy.

How does that compare with other IQ brackets? I can't baseline these stats as meaningful or not.

Beware braniacs running with the "fast crowd" omg.

[euri]

IQ also only measures one particular type of intelligence (so far as I understand it). What about EQ? With our advertising-drenched environment, those with emotional instabilities are more likely to spend badly, seeking solace in purchases, or propping up low self-esteem with the trappings of success.

Also, intelligent people are often involved in interesting but less financially rewarding professions, such as the arts, pure scientific research, and academia, while people with less lofty test scores might be encouraged to take a more practical (and usually more lucraftive) route such as business or skilled trades.

[euri]

IQ also only measures one particular type of intelligence (so far as I understand it). What about EQ? With our advertising-drenched environment, those with emotional instabilities are more likely to spend badly, seeking solace in purchases, or propping up low self-esteem with the trappings of success.

Also, intelligent people are often involved in interesting but less financially rewarding professions, such as the arts, pure scientific research, and academia, while people with less lofty test scores might be encouraged to take a more practical (and usually more lucrative) route such as business or skilled trades.

[Karl]

The IQ score and income relationship seems obviously true enough. It's logical that if you are intelligent, you are more likely to get a higher education and thus command a higher salary. The issue gets muddied throwing in the IQ/net worth and wealth relationship as it does not address inherited wealth, a factor likely to skew the objectivity big time.

Credit dependancy and payment delinquency are mute considerations. I'm sure the likes of Paris Hilton max credit out cards and miss payments quite often. Also to consider are the investing prowess of both groups (non-professional investors). Ironically, the average IQ'd person probably has an edge on generating investment returns as opposed to the brilliant guy trying to outsmart the market. THAT would be an interesting topic to study.

The notion that success is more easily solved by attitude over aptitude may be one of the more subtly destructive forces at work in our society today.

[David]

As Mark Twain once said, you can't let your schooling get in the way of your education.