Pop quiz! What factors help determine how wealthy you'll become in life? I initially guessed that education, intelligence, skills, and socioeconomic origin played a role.
Ohio State economics professor Jay Zagorsky suggests different factors: "Staying married, not getting divorced, thinking about savings." Wow.
Not only did he not list intelligence, he went on to note that "intelligence really isn't one of the key driving forces. In fact, people at the middle of the smarts spectrum have the fewest money problems."
What's going on?
When I read about his findings from a study of 7,500 middle-aged Americans, I was surprised. It seems that the smarter you are, the more you tend to earn. For each IQ point you have above someone else's IQ, you'll earn between $200 and $600 more. As an example, he noted that someone with an IQ of 130 stands to make (on average) about $12,000 more per year than someone with an IQ of 100.
That's a promising start. We who are smarter than the average bear (I'm including myself and you) would reasonably assume, then, that smarter people would end up wealthier. But that was not suggested by the study. Instead, people with higher IQs and incomes tended to spend more, maxing out credit cards and paying bills late. At the end of the day, those with lower IQs often had a greater net worth.
Zagorsky muses that smarter types might justify their spending by assuming (often correctly) that they can always earn more, if they need to. They figure they can afford to take risks. He adds, though, that "they're not smart enough to save a whole lot more of it than the rest of us."
Saving and investing strategies
I hope you've picked up on the little secret in this story: It's all about saving. The people who end up better off take their financial situations seriously and plan ahead. They think about how to manage their money effectively, and they save. How do you fare in this department? Do you have an emergency savings fund? (If not, or if you have no short-term savings, learn why you should in our Savings Center.)
You need to go further than that, though, to avoid ending up spending your last years in the rickety and flea-infested Home for Aged Smarty-Pants. You need to be saving and investing in earnest for your retirement.
The bottom line
Here's my favorite Zagorsky conclusion: "Intelligence is not a factor for explaining wealth. Those with low intelligence should not believe they are handicapped, and those with high intelligence should not believe they have an advantage."
The next time you're thinking you're not smart enough to do well at investing, think again. Think of those Nobel Prize winners who lost a lot running Long Term Capital Management -- which also cost their creditors, including Deutsche Bank (NYSE: DB), Barclays (NYSE: BCS), and Merrill Lynch (NYSE: MER), hundreds of millions of dollars. Meanwhile, many simple folks -- bus drivers, teachers, and the like -- are quietly amassing fortunes by saving and investing.
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Longtime Fool contributor Selena Maranjian doesn't own shares of the companies mentioned in this article. For more about Selena, viewher bio and her profile. The Motley Fool is Fools writing for Fools.
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