The Best Personal Finance Hack

If you’re a consumer of financial media, you’re familiar with the attention-grabbing headlines that are used for the purpose of attracting more eyeballs. For example, there was an article published a while back titled “Living in Manhattan while making only $25 an hour.” Since we all know that Manhattan is expensive, this headline is tantalizing.

How does she do it? Does she have a savings secret? Does she know some personal finance hack that everyone else doesn’t?

As a matter of fact, she does. It’s called her parents and grandparents who happen to pay for her rent, student loans, and phone bill each month. Not that exciting, huh?

I tried to find more articles to use as examples because I see similar headlines with similar stories all the time; however, there are thousands (probably hundreds of thousands) of articles on CBNC’s website and I didn’t want to take the time to look through all of them.

But the next time you see an intriguing headline like this:

be sure to read the fine print in the article before jumping to conclusions. You’ll find that a surprisingly large portion of these people’s financial success had little to do with their 10 rules and a lot to do with some sort of help or headstart from friends or family.

Having rich parents is the ultimate personal finance hack.

There’s data to back this up. A big way in which rich parents help their children succeed is by ensuring they get a good education.

A study from Georgetown found that students who scored in the top 25% of standardized tests, but were in the bottom 25% of socioeconomic status, had only a 31% chance of graduating college. Inversely, students who scored in the bottom 25% of their tests but were in the top 25% of socioeconomic status had a 71% chance of graduating college.

The graph below shows that less intelligent students from high-income families have the same odds of graduating college as more intelligent students from low-income families:

This data suggests that you’ll probably do better economically if you’re dumb and from a rich family than if you’re smart and from a poor family.

Apart from educational help, rich parents also provide higher-paying jobs for their kids and hosts of other financial opportunities not available to everyone. Research from the Equality of Opportunity Project shows that parental income is highly predictive of child income.

“[The ovarian lottery is] the most important event in which you’ll ever participate. It’s going to determine way more than what school you go to, how hard you work, all kinds of things.” — Warren Buffett

Obviously, having rich parents isn’t everything. Not all children born to rich parents coast through life. And being born to poor parents doesn’t mean you can’t become wildly successful.

As I was looking at this data this past week, the thought came to my mind that everyone starts at different places. We all have unique circumstances. Some of us are born short. Some tall. Some attractive. Some less attractive. Some rich. Some poor.

We should remember this when comparing ourselves to our friends, neighbors, and coworkers.

It’s easy to assume that wealth and poverty are simply caused by the choices we make. It’s harder to see the role luck plays in success. Being born to different families, with different values, in different places, in different generations, and the luck of who you meet along the way plays a bigger role in outcomes than we’d like to admit.

Not all success is due to hard work and not all poverty is due to laziness. This is a good thing to keep in mind when judging people, especially ourselves.

Thanks for reading!