Relationship between Education, Income, and Wealth

1. Define the following terms in your own words, then label each as either a “stock” or “flow.”

Income is flow of cash or other forms of cash are presented as things such as, wages or salaries, profit, rent, and interest.  Income is the maximum amount that one can spend during a certain period without being in debt.  Income is utilized to fund ordinary costs, for instance, movies, groceries, coffee, restaurants/fast food, going out for a night on the town with friends; clothing/retail shopping trips.  For retired and disable Americans, Social security is their primary income.  In business aspects, income that is remaining revenues after expenses is called earnings.  Almost all forms of income are taxable. Income can be considered a flow because a flow is a quantity which is measured overtime regarding a certain pay period.

According to Britannica.com, “Savings is a process of setting aside a portion of a person’s current income for future use, or flow of resource’s accumulated in the way over a given period of time (Britannica).”  Savings is an income that is not to be spent, rather is held in a deposit account until a later time.  It can be in forms of purchases of securities, increases in cash holdings and bank deposits.  Savings is not only beneficial to one’s economic independence, yet it is also beneficial to the economic growth because of the connection to investment.  For example, when a person is saving money it cannot only help them become financially stable but, also provide a safety net for emergencies.  Savings in economics is measured in dollars per unit within a certain time, therefore, it is a stock variable.

Wealth can be calculated by the worth of all assets of worth owned by a person or company, or community (Investopedia).  Wealth is determined by totaling all intangible and physical assets owned and subtract the assets by all the debts they have encountered.  Wealth can be discussed in many ways.  While net worth is the most common phrase when discussing wealth.  It can also be used in a materialistic way by discussing that it consists of all the real resources under a person’s or companies’ control.  According to the article Stocks and Flows, “The wealth of any economic unit is its assets minus liabilities.  Wealth is measured in dollars at a point in time and is a stock variable” (Stock and Flows).

2. Explain why the relationship between education and income might not be as simple as it first appears.

The relationship between education and income may look very straightforward but, it is not that easy.  In today’s world, there are multiple ways that two economies have split into two separate societies.  People with low educational achievements, such as high school dropouts or just high school graduates, who did not further their education; seem to permanently flow between depressions and recessions, with little to no stability.  While those with high educational achievement such as an associate degree or higher, encounter an increase in wealth with only minor recessions.  It also gives them opportunities to help increase personal advancement.  According to the article, The Connection Between Education, Income, Inequality, and Unemployment, it states, “In 2006 and 2007, unemployment rates for highly skilled group were as low as 2% – a figure viewed as basically beyond full employment” (Strauss).  This quote shows that the more skilled you were in 2006 and 2007, the less likely you are to be unemployed due to the low unemployment rate.  This also shows that you must spend money on education to increase your employment rate; more or less, spend money to make money.  Therefore, at first glance the relationship between income and education is extremely complex. According to The Federal Reserve Bank of St. Louis, “Factors such as natural ability and family background also impact both income and wealth and are not caused by having more education” (Wolla; Sullivan).  For example, a 35-year-old man, who only has a high school diploma is trying to find high paying job, this task may be challenging and eventually he may have to withdraw from the workforce permanently.

3. What is necessary to turn income into wealth?

In the article “Education, Income, and welfare”, it states, “Saving is a crucial element of constructing wealth… Saving to build wealth is an important part of financial planning” (Wolla; Sullivan).  If you want a higher quality life when you reach retirement.  Another necessity to turn income into wealth is by saving money now to increase wealth later in life.  In order to increase wealth now, you need to set aside some of your flow of income since wealth is build-up of saved money.  In order to turn the constant progress of income into Stock of Wealth demands that a person saves a portion of your income.

4. Describe how the following financial habits contribute to well-educated families’ ability to build wealth over time.

According to Investopedia, “Liquidity describes the degree to which the asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value” (Chen).  Liquid assets may involve stocks, bonds, and savings accounts.  However, cash is considered the most common liquid asset.  Therefore, liquidity allows educated families’ ability to raise their wealth over time by allowing the said family to alleviate financial suffering by not requiring them to accumulate debt or sell their assets, only if necessary (Wolla; Sullivan).

Low debt relative to assets, also known as debt-to-asset ratio, can help contribute to well-educated families’ ability to inquire wealth over time because according to the Federal Reserve Bank of St. Louis, “Those with low debt relative to assets pay lower interest rates” (Wolla; Sullivan).  This quote proves that those with more financial stability a person is, the less money they must pay for interest.  This would assist the family building wealth by depositing more money in their savings account rather than spending more money on interest costs.

According to the article Investopedia, “Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio.  A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk.” (Investopedia).  This conveys that it is possible for higher educated families to build wealth over time by taking reasonable risks in investing to help build wealth.  Logically speaking, a portfolio that is similarly assembled to the one stated above, incline the likeliness of lowering the risk of economic holdings.  Usually, the investor(s) expand their investments among asset accounts.  According to Investopedia, “They will then diversify among investments within the assets classes, such as by selecting stocks from various sectors that tend to have low return correlation, or by choosing stocks with different market capitalizations” (Investopedia).  This explains that investing into many different investments can be beneficial to increasing a family’s wealth by taking risks with their savings to potentially gain even more money than they began with.

Works Cited 

• “Savings.” britannica.com. Britannica, 15 Mar. 2019. Web. 22 Oct. 2019.
  <https://www.britannica.com/topic/saving>.