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Why the Rich Get RicherHave you ever heard the saying “the rich get richer”?

It’s the go-to cry of the American working man and woman against the inequality that seems to arise when more fortune seems to fall on the wealthy.

I started thinking about that saying recently and you know what?  I think it’s true.

It’s not that hard to see that the middle class is slowly being squeezed out.  Wages for middle-class Americans have been relatively stagnant while prices continue to rise.

On the flip side, the wealth of the top 1% continues to grow to tremendously disproportionate levels.

But why is that – is there a reason that the rich get richer?

The more I thought about it, the more I started to realize that there are plenty of reasons that the rich get richer – some that make sense and some that just don’t seem justifiable.

Here are some of those reasons…

 

Ugh… politics – I dread even bringing this up

Why the Rich Get Richer - Ugh... politics - I dread even bringing this up
I’ve got nothing else to say about this…

It’s a tough pill for the American people as we watch our middle class being swallowed up.  Blame the political party you hate the most, but I think that remains mostly irrelevant.

The parties don’t run the show anymore and haven’t for a really long time.

The uber-wealthy, the mega-businesses, and the lobbyists now make the decisions.  The parties are just a distraction from what’s really happening.

This is important because the changes that you see aren’t made to help the people as a whole anymore – the changes work to benefit those with the money.

And you know what happens as a result of these changes?  That’s right… the rich get richer.

I try to stay away from talking politics on here, but there’s really no way to leave this out when we’re talking about rich versus poor.

Unfortunately, we’re destined to continue down this path until it gets so bad that the people actually revolt.

And they will.

History does repeat itself and the scales will be tipped too much at some point that a revolution will take place.

I’ll probably be living in Panama at the time, but the repercussions will be felt around the world so it won’t matter.

Let’s move on before this gets too ugly in the comments!

 

Some basic rich get richer thoughts

Why the Rich Get Richer - Some basic rich get richer thoughts
I don’t wish this on anyone, but I can guarantee this would hurt the rich a lot less than the rest of the world.

I’ve noticed just in our own lives that having an emergency fund can make all the difference in the world in accumulating more wealth.

Why would that be?

Because it’s a different world when you have a little money in the bank.

Take for example something simple like home insurance.

When you haven’t got much money, you know you need insurance should anything catastrophic happen.

If you didn’t have insurance and something horrible like a fire or tornado wiped out your home, you’d be wiped out.

So you get insurance – and probably the bare minimum of coverage needed.  Additionally, you go with the lowest deductible you can because that’s all that you’d be able to afford if ever needed.

Now, let’s say you’ve got a little more money saved up – maybe a nice six-month emergency fund.  You’re not loaded, but you’re in better shape.

Similar situation, but this time you make sure that you have the replacement cost covered for your home.  More importantly, you have an emergency fund so you think, “Well, heck – the odds of something catastrophic happening are slim.  But if it actually does happen, I can cover a larger deductible out of my emergency fund.”

So that’s what you do.  You set a higher deductible, which of course, means you pay a lower premium.  Maybe you also pay in full every year or every six months.

That means that not only do you save some money every year on your insurance, but you now have extra money that you can put toward your savings or investments.

Now let’s suppose you’re really loaded… woo-hoo!!!

Similar to the above, but now you can decide to make your deductible much, much higher.

Think about that for a second.  How much money do you pay toward your home insurance every year?  Wouldn’t money for things like that be much better going toward your future?

 

Paper or plastic?

Why the Rich Get Richer - Paper or plastic?
When you have the choice between paper (assets) or plastic (credit card debt), I strongly recommend choosing paper!

If you read The Millionaire Next Door, you’ll quickly learn that those that want to look rich spend their money on crap.

Fancy houses and consumer debt tend to run their lives.

That leaves them with little to nothing to put aside to build their net worth.

The rich get richer though because they’re not as worried about trying to impress others.

Instead of a giant house (with a giant mortgage!), they might own a modest home and save the leftover money.

Instead of putting themselves in debt with credit cards (plastic), the rich are putting their money into the stock market (paper assets).

Which of those options do you think is going to help your wealth to grow significantly over time?

 

The magic of compound interest

Here’s a cool advantage that the rich have… the effects of compound interest are dramatically higher.  This should be pretty obvious – the more money you have the larger the growth with be.

Why the Rich Get Richer - The magic of compound interest
♫ Ho, ho, ho… it’s magic… you know… ♪ ♫

But here’s what’s interesting…

When you’re aiming to build up your money like you strive for in your retirement accounts, your contributions are only going to get you so far.  The money you put in is only going to get you part of the way to where you need to be.

And that’s when compound interest takes over on that whole ride and can make regular folks millionaires.

For the magic to work right, you need to have principal, interest, and time.

The more of each of these variables that you have, the more your money’s going to grow.

At first glance, it’s a gimme that the rich have more principal to grow – I mean they’re rich after all, right?!  And that’s true – the more money you can sock away, the further ahead you’ll be.

But if you think about it, aside from the principal, they have other advantages as well.  There are often “better” investments available only to the rich.

In fact, for some investments, you need to be an accredited investor.  In the U.S., that means you either need to have a net worth of at least $1,000,000 (not counting your primary residence) or have an income of at least $200,000 for the last two years ($300,000 combined if married).

I’d say that rules out a lot of folks on those investments!

Then there’s the time factor.  That should be the same for everyone, right?  Well, not necessarily.

Someone that puts him or herself through college and comes out with some hefty loans and an average salary is going to be in a tougher position than someone who had their college paid for through grants, scholarships, or family.

This isn’t a knock against either – I’m just saying that those who come out of school with loans and a lower salary will likely not be able to start saving as soon (or as much) as someone coming out of school free and clear or with a higher salary.

The rich get richer again!

 

The snowball effect

Although I’m not in the realm of being extremely wealthy, we’re in good shape financially.

And one of the biggest things I’ve noticed in our lives over the years is that the more money you have, the faster it seems to accumulate.

Why the Rich Get Richer - The snowball effect
I could have found another picture to represent the snowball effect, but this one has a tiger rolling a ball in the snow so that makes it pretty cool, right?

Granted, that accumulation is a byproduct of that wonderful compound interest.  However, money begets money.

If you have a simple $10,000 saved at a 5% interest rate compounded monthly, that means at the end of the year, you’ll have $10,512.  $512 in for your $10,000 investment… not too shabby, sport!

However, if you have $100,000 saved at a 5% interest rate compounded monthly, that comes out to be $105,116 at the end of the year.  A return of $5,116 – I’m liking this a little better.

Yes, we get it, Jim – if you have more money, you’re going to get more money back for your investment.

Yeah, but think about this.  For the next year, that second investor is now starting with $4,604 more than the first one just in interest.  So that’s going to get them even more money back the following year.

And that will continue to snowball every year creating a larger and larger nest egg.

In other words, the richer you are, the faster your money is going to build upon itself to make you even wealthier.

 

Taxes are for the poor

Why the Rich Get Richer - Taxes are for the poor
The tax man cometh!!

As a hard-working poor or middle-class employee, you’re stuck paying the most in taxes.  W2 wages are taxable at up to 37% in 2018 depending what you bring in… and that’s just the federal taxes.

Unfortunately, this is where most of America lives and breathes.  It almost seems like the harder you work and the more money you make, the more you’re penalized.

The rich, though, generally move a lot of their focus into starting their own businesses or concentrating their time in other areas like real estate.

There are a few good reasons for this…

The first is that there’s an unlimited possibility of income in these other areas.  Unlike most employee jobs, you’re not going to hit a ceiling working for yourself.  The more business you do, the more money you can make.

The second reason is tax rates.  For instance, the corporate tax rate for 2018 is 21%.  That 16% less than W2 wages!!

A third reason is that the government gives you some tax incentives that can provide you with the ability to make money but still legally show a loss on paper.

Depreciation on rental property makes this relatively easy for many rental property owners to make happen.  Imagine getting a tax refund for making money – crazy, right?

 

The risk becomes much less

Why the Rich Get Richer - The risk becomes much less
When you have a bunch of these briefcases laying around, investments can be less risky than it would be for someone with very little cash in their stash…

This is probably the most important point on why the rich get richer.

When you don’t have a lot of money, every choice you make can have a profound effect on your life.  If you make an investment, you might be putting your entire life savings on the line.

In fact, it’s also possible that you’ve come up with an idea where you start raising money to make it a reality.  So not only could it be all your money on the line, but someone else’s as well.

If it works, great – success story!  If it doesn’t, you could be wiped out completely and be totally devastated financially.  Horrible, right?

Now, think about if you have a decent amount of money already put aside.  Depending on the cost, an investment that goes south could still hurt you, but it’s likely not going to completely ruin you.

Not only that, but you might have some extra money to spread into other investments at the same time.  Maybe hedge your bets a little bit instead of putting all your eggs in one basket.

Hopefully, you end up with most of these investments doing well for you and making you even more money.

Sounds good so far, right?

But when you’re rich, it’s a whole different world… in a good way.  In fact, in a great way!

You know that fear that you’re likely to have taking a chance on something with barely any money saved up?

That’s not going to be the case for the rich.  An investment that the rich make will not generally cause them financial devastation.  It might barely even be a blip in the radar.

Let that sink in for a minute.

That makes risks for the rich, well, not that risky.  They don’t have that fear factor that the rest of the world has because they can afford to take the risk.

How’s that for insanity?!


All in all, the rich can save a lot more, invest more with less risk, and have more control over the rules of the game.

And that’s why the rich get richer!

 

What am I missing?  Let me know your thoughts…

 

Thanks for reading!!

— Jim

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Why the Rich Get Richer
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18 thoughts on “Why the Rich Get Richer

  • May 15, 2018 at 11:57 am
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    Hi Jim,
    I don’t think you are missing anything. The post reminds me of the old adage “it takes money to make money”. Your points fill out the meaning of that saying in a positive way. Tom

    Reply
    • May 15, 2018 at 3:07 pm
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      Thanks, Tom – yeah, unfortunately, that saying generally rings true most of the time.

      — Jim

      Reply
  • May 15, 2018 at 2:13 pm
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    Can’t say I disagree on any of these points Jim. I might also add that it’s still very possible for an “average Joe” to join the ranks of the wealthy.

    Compound interest is a beautiful thing, and once you understand the rules of the game, life gets a little easier.

    Reply
    • May 15, 2018 at 3:14 pm
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      So true, Mr. Tako – I think I was (still am!) one of those average Joe guys that your point exemplifies. I don’t consider us to be wealthy, but we’re definitely in great shape and started from zero (actually less than that) and focused on saving and investing more than spending.

      I like the way you put that about understanding the rules of the game, too. That was huge for me – once I “got it”, we were able to make great strides forward.

      — Jim

      Reply
  • May 15, 2018 at 6:16 pm
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    Yeah, I think the biggest one is investment/compound interest. When you’re rich, the investment income is high. That free you up from the day to day grind. Rich people can focus on becoming richer. Poor and middle class folks is too busy with their day jobs.
    You’re probably missing the mindset or something like that. Rich people think differently about money.

    Reply
    • May 16, 2018 at 8:25 am
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      Ooh, good one, Joe! It’s fun to talk to and get into the mind of rich people – their take on things is usually completely different than that of the poor of middle class.

      — Jim

      Reply
  • May 15, 2018 at 7:54 pm
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    Money begets money. Honestly that’s how life works, if you have it it’s easier to get more.

    That being said one other point lifts to the top. The rules of the game aren’t always clear, but if you learn them you’ll go far. Things like credit card hacking or investing are simple concepts but since they are not taught in the mainstream, they don’t live there. But those who are on the wealthy end of the scale either know the rules or pay someone who does.

    Reply
    • May 16, 2018 at 8:26 am
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      Gotta know the rules in order to win! 😉 I just started credit card hacking this year and the return I’ve gotten from such a little bit of effort is astounding.

      — Jim

      Reply
  • May 16, 2018 at 3:32 pm
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    Hello Jim,
    A good read and one that I’m passing along to family and friends. In today’s political and economic climate you, sir, have hit the nail squarely on the head. Thanks

    Reply
  • May 18, 2018 at 12:03 am
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    Hi Jim,
    I enjoyed the post. It had an affect on me because anytime I hear about or read or see the words, “inequality” it raises my blood pressure slightly. Actually, it’s the politics behind “inequality” that gets me riled up. You see, many, many average joes feel that a person with a million dollars in assets is rich, is wealthy and they think that’s not fair. I beg to differ. Actually, I call bullshit on that! I’m an accredited investor but I’m not rich and I’m not wealthy. I have a full time job like most people and I pay taxes. I’m working with compound interest and my accounts are growing just like yours is. But it is fair that I’m growing my net worth just like you are. The liberal politicians and the constituants, the Bernue Sanders fans, want a piece on OUR (yours and mine) net worth. They have the philosophy; “My neighbor has a cow in his pasture, but I don’t have one, that’s not fair, I’m going to take his cow.”
    See how worked up I get about inequality. Again, your post had an affect on me, it was a good post!

    Reply
    • May 18, 2018 at 12:02 pm
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      Haha, I got you all riled up, but I do hear ya. Money definitely has the ability to cause a divide between people. There probably will never be happiness across the board in our political world, but hopefully I didn’t get you going too much. Have a great weekend!

      — Jim

      Reply
  • May 21, 2018 at 2:19 pm
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    I honestly think it’s worth the risk. My friend once said, scared money doesn’t make money. The rich get rich because they might be wiser with their investments and have more to invest. I’m young and I’m trying to invest as much as possible wisely of course. I figure, if I lose I will have time to recover. Thanks for this article!

    Reply
    • May 21, 2018 at 9:21 pm
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      Saving and investing young will put you light years ahead of most folks for sure, Joe!

      — Jim

      Reply
  • May 21, 2018 at 6:05 pm
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    The Millionaire Next Door is one of my favorite PF books. I also really like The Automatic Millionaire. Being frugal is what helped me turn a $5k account into a six-figure 401(k) in 6 years. I say why look rich when you can be rich. You have to choose FI and pursue wealth. Not just spend it.
    Thanks for sharing,
    Miriam

    Reply
    • May 21, 2018 at 9:27 pm
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      Both of those are fantastic books! One of the great things about The Automatic Millionaire is its simplicity. Once you have everything automated (and updated periodically), you’ll look back one day and just wonder how your nest egg got to be so large!

      — Jim

      Reply

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