In “How to Get Wealthy in an Economy Broken for Young People,” Scott Galloway delves into his framework for achieving financial security, addressing economic challenges that particularly affect young people today. Below is a more detailed breakdown of his ideas:
1. Defining Wealth and Financial Security
- Concept of Wealth: Galloway defines wealth as having passive income that exceeds personal expenses. For instance, his father lives on a fixed income from a pension and social security, spending less than he earns and thus maintaining financial stability. Meanwhile, many high-income earners he knows live paycheck to paycheck due to excessive spending, which ultimately leaves them financially vulnerable.
- Economic Security: According to Galloway, wealth is about freedom from financial worry. It’s not how much one earns, but whether income exceeds expenses sustainably. Financial security is the foundation of wealth, allowing individuals to make choices without constant financial stress.
2. The Four-Part Formula for Building Wealth
- Focus on Mastery:
- Skill Development: Instead of pursuing hobbies or dreams that may be risky or lack stable employment prospects, Galloway advises young people to identify their talents and work toward becoming top performers within a field that has a high employment rate (90% or higher).
- Grit and Dedication: Success often requires around 10,000 hours of focused effort to achieve mastery. He emphasizes choosing fields with a strong job market, such as healthcare, law, or trades, rather than entertainment or other “glamorous” industries, which tend to be less financially stable.
- Avoiding Risky Careers: Many young people gravitate toward arts, sports, or startups. However, Galloway notes that success in these fields is rare. Instead, he advocates for balancing passion with pragmatism in career choices.
- Developing a “Savings Muscle” (Stoicism):
- Spending Discipline: Galloway emphasizes that consumer culture constantly encourages people to spend. Developing a habit of living within or below one’s means is crucial, especially as marketers continually push “upgrades” and add-ons.
- Gamifying Savings: He suggests making saving money a game, especially when young, by finding enjoyment in frugality and seeking affordable experiences. Galloway describes how he and friends survived on minimal budgets in college by tracking spending and challenging each other to save.
- Reducing Consumer Pressure: Recognizing that “no one cares about your stuff as much as you do” can help people detach from the social pressures to spend on status symbols.
- Diversification in Investments:
- Mitigating Risk: Galloway cautions against putting all resources into a single investment. He shares his own experience of financial losses when he was overly invested in technology stocks and his own companies.
- Index Funds: Instead of attempting to pick the perfect stock, he recommends low-cost index funds as a way to gain broad exposure to the market, particularly to strong tech companies, while minimizing risk. Index funds, especially those covering the S&P 500, provide balanced exposure and are less susceptible to catastrophic losses.
- The Value of Patience: Galloway stresses the power of compounding interest over time, noting that an 11% annual return can lead to an eight-fold increase in investments over 21 years. This long-term growth can be achieved by holding diversified investments and avoiding excessive trading.
- The Power of Patience and Long-Term Perspective:
- Understanding Time’s Impact: Galloway highlights a common blind spot among young people, who often can’t grasp how quickly time passes. By starting investments early and letting them grow untouched, young people can benefit significantly from compounding returns.
- Value of Consistent Investments: Galloway gives an example of a friend who prioritized consistent contributions to retirement accounts. Though this friend earned less annually than Galloway, he accumulated significant wealth by starting early and relying on compounding.
3. Intergenerational Wealth Imbalance
- Systemic Economic Inequities: Galloway discusses how current economic policies have disproportionately favored older generations at the expense of younger ones. Key areas affected include:
- Housing: The price of housing has skyrocketed, pushing homeownership out of reach for many young people, which affects their ability to accumulate wealth. Interest rates on loans have increased from 3% to 7%, further straining affordability.
- Tax Policy: Tax breaks, such as mortgage interest deductions and capital gains, benefit those with wealth—typically older people who own homes and stocks—while younger generations, who primarily rent and earn from labor, receive fewer benefits.
- Income Inequality: A few high-profile tech jobs and sectors dominate income growth, but many young people working in less lucrative fields struggle with stagnant wages. Galloway emphasizes that this divide is often misrepresented as success for all young people, when in reality, the prosperity is concentrated.
- Social and Psychological Consequences: Many young people are putting off milestones like marriage and parenthood due to financial insecurity, leading to lower birth rates and increased mental health challenges, including anxiety and depression.
4. Building Wealth Beyond Money: Community and Character
- The Importance of Social Networks: Galloway points out that financial success is often influenced by the strength of one’s social network. The behaviors and income levels of the five closest people in one’s life can significantly impact personal habits and financial outcomes.
- Character as an Economic Asset: Traits like integrity, kindness, and a genuine investment in others can lead to economic benefits. People who build strong relationships tend to have allies who support them in business and personal ventures, creating more opportunities for wealth.
- Marriage and Financial Health: Divorce is one of the leading causes of financial instability, and Galloway discusses his own experience of losing 60% of his wealth in a divorce. Maintaining strong personal relationships and investing in character can help mitigate such financial risks.
5. Structural Changes Needed for Youth Economic Security
- Policy Recommendations:
- Increase Housing Development: Galloway advocates for laws that force counties to issue housing permits in line with population growth. This would address housing shortages and reduce artificially inflated property prices.
- Tax Reforms: Galloway supports restructuring taxes to lessen the burden on younger generations. He argues that wealthy older generations benefit disproportionately from existing tax policies.
- Educational Opportunities: He believes universities should expand enrollment rather than maintain low acceptance rates. Exclusive admissions and high tuition costs restrict educational opportunities, worsening economic inequality.
- Global Examples: Galloway mentions countries like New Zealand and Israel, where proactive social policies have effectively addressed homelessness and mental health issues among youth. He suggests the U.S. could adopt similar approaches to address these systemic challenges.
6. Galloway’s Optimism and Frustration
- Hope for the Future: Galloway believes the U.S. has the necessary resources and innovation to address these issues. The challenge lies in restructuring policies to distribute wealth more equitably.
- Frustration with the Status Quo: Galloway is critical of older policymakers who have benefitted from existing economic structures yet resist necessary reforms. He calls for a shift in priorities to support young people, who currently face more economic challenges than previous generations.
In summary, Galloway’s approach to wealth focuses on a balance of practical financial strategies (like mastery, savings, and diversification) with character and community building. He advocates for systemic policy changes to address intergenerational wealth imbalances, believing this shift is essential for a fair economy that supports young people’s potential for success.