Why Do The Rich Get Richer?
| April 30, 2012 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
Have you ever wondered why the rich get richer? Such topics seem to touch a populist nerve. Some use the rich get richer as a basis for all that is wrong. After all, the golden rule is “he who has the gold makes the rules.” Personally, I believe the answer is complex and multi-factorial. In addition to the divisive political and sociological issues surrounding economic disparity, there are personal finance aspects of the discussion that I think we could all benefit from. In this article, we discuss eight reasons the rich get richer.
Debt
One reason the rich get richer is because of their views about debt. The Duggar family is perhaps the perfect recent illustration of this. If you are unfamiliar with their story, the Duggar family is known for having 19 kids. They are on the reality show 19 Kids and Counting on TLC. The economic impact of having such a large family is enormous. According to the Census Bureau, it costs about $250,000 to raise just one child from birth to age 18, so you can imagine the substantial financial challenges with raising 19. If you thought that they hit the jackpot because they are on reality TV, you may be surprised to learn they were financially comfortable before they were earning between $25,000 to $40,000 per episode. They attribute their success to the fact that they were DEBT FREE, didn’t use credit cards, and used the excess capital to invest successfully in commercial real estate.
Even many of those who are pretty strict on borrowing could stand to learn from the Duggar family. They decided that they would not purchase a house that they couldn’t afford to buy outright with cash. Then, they grew their home with their income (I know it is a very novel idea), which was buoyed by their smart investments. The Duggars’ aversion to debt is not unique among financially successful people:
According to a survey by Forbes, 75% of the Forbes 400, the 400 richest Americans, believe that the best way to get rich is to become and stay debt-free.
Debt limits your potential by binding your most powerful wealth-building tool: your income. Additionally, people who are free think differently than those who are indebted.
Income
The average income of millionaires is $350,000, roughly 5 times the average income of the typical North American family. Millionaires are, as a group, economically productive. Many have created businesses or chosen careers uniquely suited to their personalities, abilities, education, and passions. Thus, the success that follows is not particularly surprising.
Personally, I think we all benefit from careers that are authentic fits for us; that is likely the best way to significantly improve compensation. If you are a traditional employee, examples of some questions you should ask yourself are: do you consistently get bonuses and complements on your work? Do you frequently get offers from recruiters to double your pay? Does your boss trust you and give you autonomy with your work even though you may lack direct experience in a particular area? Do you have a proven track record of excelling? Remember to keep in mind what you are “playing for.” Likewise, if you are a business owner, you may be asking about ways to increase your profitability, to carve out or maintain your competitive edge, or to better market your goods and services?
Too often, we passively assume things will automatically fall into place professionally and thereby relinquish any power we have to take control over our career advancement. Purposefully, improve your income and your influence. Look for ways to become a thought-leader in your area and to leverage your intellectual expertise. Are you willing to pay the price to become among the most highly compensated in your chosen career?
Assets
The rich fill their portfolios with income-producing assets. For example, while I cannot use him as a model of fiscal responsibility, one credit to Michael Jackson’s financial acumen was that he appreciated the value of acquiring assets. He purchased music catalogs and other assets that generated income and supported a lifestyle that few could even dream of. Did he make financial mistakes? He made plenty, yet at the time of his death, Michael’s net worth was reportedly around $50 million. Regardless of your feelings about his financial habits, that sum is significant and speaks to the value of acquiring or creating assets. A second reason owning income-producing assets is important is because of leverage. Rather than working only for linear income, such as with a traditional job or even with self-employment in some cases, asset holders earn passive and portfolio income as well. Thus, their income continues after their work is completed, and their time is better leveraged to pursue other interests, including building more wealth. Of course, if you are the owner of a business that does not require you to directly operate it daily, then you have similarly leveraged your income. Thirdly, assets are important to the wealthy because the types of income that assets generate, particularly passive and portfolio income, are often tax-advantaged compared to earned income.
Taxes
Render unto Caesar the things which are Caesar’s – Bible
Taxes are not trivial. We’re taxed when we earn, spend, save, and invest. Taxes are typically our number one expense. If you plan to build significant wealth, it pays to appreciate the tax implications of your financial decisions, such as utilizing tax-advantaged retirement accounts, retiring early, purchasing (or creating) tax-advantaged assets, and receiving tax-advantaged income. In fact, the distinction between tax-deferred and tax-free accounts alone could be in the seven figures over a lifetime. Familiarizing yourself with at least some of the basics of the tax codes can greatly empower you to make wiser decisions with respect to your money. Also, don’t shy away from consulting experts (accountants or tax attorneys), when necessary, or getting second (or third) opinions. A lord chief justice of England reportedly said that a citizen has “not only the right but a duty to pay only the minimum tax applicable to him.” Learn how to effectively (and legally) minimize your taxes, or you may not have the capital to finance your dreams.
Network
I recently went to bachelor party with some friends and was shocked to realize just how many professionals attended. It might as well have been a networking event. It was the late billionaire J Paul Getty who said if he were down to his last five dollars, you would not find him in some cheap restaurant trying to eat all he could. He would rather be in a nice hotel lobby drinking coffee with visionaries and leaders. His rationale was that the people he wanted to be a part of his future were at the hotel not the restaurant. See the wisdom in his decision. In fact, if you want to predict someone’s income, look at the average income of their 5 closest friends. That’s because birds of a feather not only flock together; they often end up at the same destination. I can think of countless opportunities that have been presented based on network alone. Sometimes interviews are rendered completely unnecessary or just a formality because of the strength of a recommendation from within a network. One of the biggest advantages of joining organizations is the network of members that they provide you access to.
Be particularly discerning about who you network and don’t network with. If you are an introvert, like myself, there is hope. Read books like How to Win Friends and Influence People or 25 Ways To Win With People, or even consider enrolling in a program, such as Dale Carnegie’s Effective Communications & Human Relations/Skills For Success course. Don’t limit your financial opportunities because you are stuck with familiar.
Experience
If you did it before, you can do it again. That’s the general sentiment anyway, which is why so many employers look to hire people who can demonstrate a proven track record. Additionally, that’s why people who once earn six and seven figure salaries, but get knocked down, have a tendency to earn it again. Once you get comfortable at the next level (whatever that means for you), it becomes distinctly uncomfortable with anything less.
This reminds of a fabulous story of a dog, Anja, who was selected to go through an extensive $16,000 training course. Although she wasn’t the only dog of the household, she was chosen by the trainers as having the highest aptitude for this program. Once Anja was trained, she then spent a great deal of time with the owner, much more than the other dogs of the house. She rode with him, ate with him, traveled with him, and had a very pampered life. Time passed, and she brought her owner much joy, so he thought that he would reward Anja by placing her with the other dogs, so that she could interact with her own kind. The accommodations were less lavish but more than adequate. However, instead of being grateful, she acted as if she was being punished. It was as if she was saying “who are these beings? I’m made for luxury and to be YOUR companion.” She was no longer comfortable with what was once familiar and satisfactory. She wanted out because it was no longer good enough. I am a firm believer this is what happens with achievers. Achievers know that they are made for greatness, and anything less will simply not do.
Courage
These can be perilous times. The persecution of the frugal is not imagined; the wealthy seem to be twice as often despised than admired. Additionally, there is an onslaught of people trying to steal what it might have taken a lifetime to create. Do you have the courage to forsake popular opinion in favor of your convictions, to forgo the luxury cars and McMansions when they do not fit within your budget, to tell your family, friends, coworkers, and possibly even neighbors NO. In Do You Have The Courage to be Wealthy, I discuss how courage is necessary to build significant wealth due to the risks you may undertake and the adversity you will inevitably face and because the path can be tremendously lonely.
In fact, Felix Dennis said “never yet have I met a self-made rich man or woman whose family or personal relationships were not plagued by the burden of creating a fortune, even a small fortune.”
Nonetheless, if the price to pay to build significant wealth was small, everyone would pay it. Courage to thrive in this environment is vital.
Family
“Can you live forever? Marry the wrong spouse, and every day will feel like an eternity. Marry the right spouse, and life will be joyful and perhaps even a rich experience.” Thomas Stanley
Ninety-two percent of millionaire households in America are composed of married couples. Interestingly, the divorce rate of nonmillionaire couples is 3 times that of millionaire couples. To say that there is a strong correlation between being married to the right mate and building wealth is clearly a massive understatement. Divorce is consistently 1 of the top 5 causes of bankruptcy, but you don’t need me to point out the financial havoc that divorce can have. Thus, protecting marital unit is not only a matter of the heart… it is also a matter of the wallet.
Although financial compatibility is important, couples bound for the altar should make sure that they are compatible on multiple levels. Dave Ramsey often says marriages have a statistically better chance of surviving if the spouses agree on spiritual, financial, children, and extended family matters. Over 90% of millionaires ranked their spouses as being honest, responsible, loving, capable, and supportive, and there was no significant difference between male and female respondents. In short, marital fidelity affects your financial fidelity.
Closing Thoughts
In conclusion, there are multiple reasons the rich get richer. If your current path isn’t leading you to build significant wealth, recognize the signposts, and adjust your course accordingly. I’ve heard that we ultimately may not decide our futures; we decide our habits, and our habits decide our futures. Birth “rich habits” today. Embrace and emulate those that are where you want to be, and your journey will no longer be as lonely, your struggles may be lessened, and your life will surely be changed for the better.
Change before you have to. Jack Welch
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A very motivating post RoShawn! I also thing attitude is more important than aptitude in any endeavor. Having the right attitude is half the battle won.
Thanks Moneycone! I think attitude is very important too. People discount it, but it can be a game-changer.
I wish they taught these things in school! Sadly, I see many students in Community College who are unmotivated, plugged into their entertainment devices sadly lacking in the ways of the real world. Twenty years from now they will undoubtedly be complaining about those with higher incomes.
Robert,
I agree entirely. People use it as a justification for failure all too often. It is all too tragic. No one is saying life is fair, but a great deal of it we control. It's too sad we relinquish our own power due to ignorance, laziness, or lack of discipline. Sure hardship occurs, but often that's not the deciding factor; how you respond to it is in so many cases.
Nice article Roshawn. You can learn a lot from rich people. Provide they didn't obtain their wealth through force or fraud, I think they ought to be admired.
Thanks so much Drew! I agree that you really can learn a lot wealth from someone who is rich. I understand the fraud point but feel that makes up such a small percentage of rich people that it really is the exception rather than the rule. It is too sad more people are not so open-minded!
Interesting fact about family and marriages.
I think the rich gets richer because they know how to make their money work for them. They have income producing assets in addition to their own earned income and there is no way for someone who has debt can keep up with that.
The network is a really good point too. That's one reason why I think an good Ivy league school is worth the price (depending on the major.)
I agree that the majority of those who have generated significant and lasting wealth know how to make their money work for them. As implied in your comment, that's how they go there to begin with. I like your debt point; my next post is about just that. The network is becoming increasingly important to me. I have now seen it benefit me and others I know much more than I ever expected; whether that extends to Ivy league education will always be debated. Personally, I'm like you and can at least understand it for certain majors.
This is one of the reasons I surround myself with rich successful people. It gives me access to information or advice that is not commonly available.
Agreed KC, sometimes you simply don't know what you don't know. There's someone who has been there and can help spare you all sorts of heartache via "trial and error."
Great article. You have just given your readers a wealth of information. I have found that those who are going to become weathy will gain the information necessary to achieve their desire.
My goal was to become happy and yet in my search I discovered that happiness also requires being financially secure. Being financially secure will open many doors to a life of freedom and happiness.
You have a wonderful way of putting ideas into actionable concepts.
Thanks very much Lee! I so value my readers that I labor to give them my best because they are generous enough to subscribe, tweet, comment, vote, etc., and it is always nice when that effort is appreciated. Thank you!
when I read your comment about happiness and financial security, I laughed to myself. I agree. I do think that financial security should be a minimal goal. The alternatives are downright demoralizing. While I can't speak for others, I know I am happier when the major areas of my life (including finances) are on the right track!
For me rich people make effort. They put in the time and do what they need to do to reach their goals. They are also often very pragmatic and take time to devise a plan. This kind of approach is a win win in most cases. The more we educate, prepare ourselves, and plan, the better off our outcomes usually are. To me this is wisdom; knowing that you need to do this.
I definitely agree that effort and goal-setting are indeed involved. There is more to it than simply working and expecting for things to fall into place. It is the very revelation that Robert mentioned earlier many are in for. Not to be a pessimist, but come twenty years, many people will be in for a very rude awakening unless they get their acts together. The strategic approach you laid out would absolute be an asset in some many situations and lead to uncommon success.
It's become clear to me that wealthy people pack hunt, and rely on good referrals from each other. In a book called Selling to the Affluent, the author states that once you begin working with wealthy clients, make sure and treat them well (as you should all people, of course). Because their time is valuable, they pass referrals like wildfire among each other whenever someone finds great help. Being a part of this network to find great resources is invaluable.
That's a great point. You do onto on well, can you will absolutely fill your calendar for XYZ service faster than you would believe. One reason for this is time. If someone you trust has already vetted someone for you, then unless you have a specific problem, why would you try someone unproven (all things being equal). There so much more here. This comment really got me thinking about some future projects. Cheers!
Good one, Roshawn! These are all probably conditions for being wealthy. However, they are not 'reasons'; thus my question: what do you think are the reasons for people to create this conditions?
Hi Maria,
What I present here are essentially some of the concepts the rich use to get richer. It sounds like you are asking for the rationale for becoming rich. I think it largely depends on who are you defining as rich. The reasons that a decamillionaire has are not the same as a billionaire. I suppose most billionaires are driven by a desire to change the world; they have a distinctively different risk tolerance from the merely rich or even the financially comfortable (which would include the decamillionaires). I believe most people who society classify as rich are driven by love for their professions/careers (or for the benefits of their careers) and for a desire to be comfortable.
Great post Roshawn. Success breeds success. Also the rich get richer because they aren't living paycheck to paycheck and can afford to take risks. They operate on the offensive as compared to others who have to watch every penny and play defensively. Nice work!
Thanks Buck!
"Success breeds success" sounds about right. Again, you are bringing up how much can be accomplished after building a strong foundation. I think your comment and the rest have even further convinced me of the importance of getting your ducks in a row. I love your offensive comment. That's rich.
Always a pleasure reading your posts. When you live within your means and don't pile up debt, you can prosper. Seems there should be a lesson for governments in there somewhere.
Thank you so much Thad. I agree too; building that foundation is so pivotal.
Re: Congressional spending… if only that lesson was taught!
Great post, Roshawn. I really like your outlook on life and your motivation. So much of it comes down to state of mind.
Thanks Kevin! I agree the attitude and the wisdom one has profoundly affects his or her results.
Such an interesting article! I admit it, if you somebody is already rich, it is much easier to get richer, there are so many possibilities to multiply your capital with some smart techniques. Now I only have to figure out how to get rich:)
Hi Anna,
Thanks so much Anna! Yeah, it really is amazing what someone can do if they already have strong foundation, which is further illustrated by the Duggar's story (under the Debt subsection). Honestly, I find that very motivating and empowering because it a portraits of our potential. I absolutely love it, and I don't personally find figuring out the best way to become rich intimidating because 8-9/10 millionaires are first generation millionaires anyway. If they figured out how to build a strong financial foundation, so can most people. Thank you kindly for the comment!
Great read. This article reminds me of similar research done by UGA professor Stanley who wrote several NY best sellers including millionaire next door. It always helps to understand millionaire's mindset.
Thanks Shilpan,
I'm very familiar with his material, so I am not surprised you see the influences.
Great post Roshawn. The key here is momentum. The rich have positive forward momentum. Debt is a drag that prevents us from getting up to speed.
Thanks John!
That's a good point as well. Once the rock gets rolling, it is easy to expand and improve your position incrementally. That's certainly what happened in the Duggar's case. In fact, I remember years ago, that happened when my wife and myself were becoming debt free. The "snowball" effect is real and very powerful
I think you can't overstate the impact of family, and I'm glad to see you mentioned it (although I'd argue it might deserve a higher spot). Families that have been wealthy for generations know how to manage their money – that's why you see so many families maintain that wealth and why, on the other end of the spectrum, there are families that seem to continually live in poverty because they don't have the tools ingrained in them how to get out.
Thanks Elizabeth,
I appreciate you bringing up the family point. I didn't mean for people to infer that the subtopic positioning within the post denotes the subtopic's relative importance. It was just the order the topics came to mind honestly. I typically do put a focus on debt, as that's what so many people struggle with. The family dimension often gets lost, yet it is VERY powerful, so I agree with you that it deserves some prominence.
Lots of wisdom in this post. I was unaware of the high statistics of married millionaires.
Thank you Josh. Yeah, I remember when I initially learned it. I was FLOORED too, although it makes total sense in retrospect.
I was surprised to read that the divorce rate of non-millionaire couples is 3x that of millionaire couples – but then again, I've heard that the #1 thing couples fight about is money! I guess these millionaires just have nothing to fight about?
Hi Julie,
Yeah, that data is particularly interesting. It is not highlighted when we discuss marriage, yet it really speaks to just how poor the chances of nonmillionaire households have of staying married: the millionaires are presumably driving the overall marriage statistics, and it's still only at 50%. That's a lot of food for thought.
Wow, didn't know the average millionaire income is $350,000! That's a lot actually, and way more than I would ahve thought.
Yes Sam, it is quite a lot. It suggests that the average millionaire is in the top 1% of income earners. Of course, averages are subject to outliers, which is likely skewing the data upwards. I think that's why we see 10% of households being millionaires (when including primary residence). I always enjoy posting on this topic. Thanks for the comment.
Great post with a lot of effort put into it! My favorite is what Getty said-so very true!
Thanks so much Steve! That Getty quote resonates with me too!
A very complete overview. I would summarize it by that the rich leverage what they have and therefore get even richer. They have more to leverage and more know-how on how to do so.
Thanks for the feedback Van. Oh, that's is so right. Leverage is probably the second most important word in the world of money. It gets easier once that foundation is built.
Marrying the right spouse is so important! I keep telling my husband that if we ever end up divorced, we will miss our chance of being millionaires.
Great post. I love how you touched so many areas. It is not just debt free or investing… there are many factors that go into a "wealthy" way of thinking.
Thank you so much Tim! I'm glad the more holistic approach to wealth-building resonated with you. I am honored that you read the article and that you took the time to comment. Best Regards!
The Duggars used to claim their home as church to be exempt from property taxes. I would not call living cramped in a dilapidated 900 sq ft home with 8 kids financially comfortable. TLC chipped in and helped them finish the kitchen of their current home and supplied some furnishings. They are Christian Fundamentalists/Quiverfull who follow the teachings of Bill Gothard. You will have to search yourself because it is too long to explain here. anyway, their views on debt are unrealistic. I see nothing wrong with debt for the right reasons and if it is within your means. It is hard to be debt free when you are the victim of the economy.
Their views on debt are clearly out of line with mainstream. I definitely believe they are extreme and a bit much. What I find interesting though is how often the very people who have extreme views on debt (i.e., Kiyosaki and Dave Ramsey) are often very successful. In Kiyosaki's case, he is very lilberal on income-generating debt, and Dave is very anti-debt although he makes allowances for the home mortgage. Anyway, I'm okay with people making large short-term sacrifices for long-term goals. That's why I featured the Duggars, not because I think that there way is the only way to financial comfort but because they paid the price to win, which is admirable in my book. I definitely respect everyone's opinion to do what's right for them with respect to debt. I am also not saying that living debt-free is easy. However, it does become easier, particularly with respect to consumer debt. We've been debt free for several years now and have never looked back. Thanks for your comment!
Nobody is a "victim" unless they allow outside circumstances to win. Even in today's tough economy there are people who have re-invented the wheel and learned how to successfully roll through it and make money.. The one's who aren't, are the ones who gave up / gave in, and try to continue to do business today as they did yesterday.
Time changes, and if you are not willing to change, or prepared to change with it, it will take you… Recession or not, that's an individual responsibility to be able to adapt and change as times change..
Sorry, just being honest…
You certainly don't have to apologize for being honest!
I do agree the burden is on us to be adaptable to our circumstances. Although some of us are more equipped for this than others, and that's part of the challenge. Life is not fair, and their are some people to whom things come easy. I think that one challenge that we have is to stop comparing ourselves to other and be our best selves!
I think many people misrepresent the "winning" element that makes us successful in life. I'd like to share one thing that is an important key element in having the type of life you want. No, let me share a couple views. Then you decide for yourself.
1.) Successful people don't pick a job and then try to budget their way to success. Successful people "decide" what lifestyle they want, then find a means or way to have it! This view is an extremely important element in a successful person's life!
2.) Successful people never view today as the highest level they will achieve. Each milestone is in their rear-view mirror and they are already well into the execution of the next phase towards the next wrung on the ladder.
3.) Successful people never: lose sight of the prize, dwell on mistakes, stop learning, or compromise their vision.
4.) Successful people surround themselves with OTHER successful people. They have Mentors, peers and STRONG resourceful people that they can turn to, to ensure they succeed.
What steps are you taking today? Although being conscious of your expenses is smart, it's relative to your income. Successful people spend more because they make more. They also save more because they make more. So, the TRUE solution here is to rise up! "YOU" are the "ONLY" person/element standing in the way of your tomorrows…..
Start fixing the "ONE" element which will indirectly/directly fix them all… YOU!!!
Read: Quantum Success, The Attractor Factor, and The Secret…. These are good tools to help you start envisioning a new life, and a new way of thinking about life and its rewards.
If you are a manager or business owner, I would also suggest that you read the new concept in managing people. A way to empower ALL of us to give more / get more… Daniel Pink's book "DRIVE" …
Awesome tips!!!!
I hadn't heard of Daniel's Pink new book, but am familiar with some of his other work. To me, the mentorship and network factors are really important. It is amazing how far you can get ahead if you have access to the right people. Sometimes a golden connection is worth years worth of labor. Thanks for your comments!
Amen!! Well said Watsonic.. 🙂
Rich people know where to invest and exert all the effort to the business they’ve chosen. Applying for a loan and credit card is not a good choice for them; these are just some of the things that I’ve learned when I’ve spoken to rich people during a youth congress.
Hello Jo,
Thanks for sharing. I think those are definitely some perceptive observations. I'm always happy to learn how to better manage my finances by people who have their acts together.
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