The Rich Get Richer

By: Roshawn Watson

Just yesterday, I heard a prosperous (understatement) businessman say that he didn't believe that the rich got richer and the poor got poorer because everyone has the same opportunities to move between classes, so the poor can become rich and the rich can become poor. In his opinion, money is quite dynamic. While I acknowledge there is some truth in his statement about opportunities, for the most part I disagree and believe that the rich do get richer. There are patterns of behavior that set one's trajectory for poverty or great wealth. Generational poverty and wealth (despite the ~~death~~ estate taxes) exists, but how does one get on the right side of the wealth equation? Here are some thoughts.

Your Environment Matters

It was the late billionaire J. Paul Getty who said that 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 his wisdom. This is a profound statement (and not because you can no longer get a full meal for 5 dollars in most cases). He's suggesting that:

WHERE you are matters MORE than WHAT you are!

Your environment is just as important to your success as what you know. Our environments can encourage us to strive for excellence or comfort us in our mediocrity. It's tormenting to think how many dreams have been destroyed by toxic environments. Think about the movie Precious. What could Precious have done had she been in the right environment all along? Clearly, she was a survivor and a capable young woman, but suppose the only thing she had to survive was high school instead of financial, emotional, physical, and sexual abuse. Once she left that mess, she began to reclaim her life.

Wealthy Habits

Oh... THIS IS A BIG ONE! Habits mean that the thing you do twice becomes easier. Don't be mistaken, habits are not the same as discipline. Discipline is the conscious effort to birth a habit. Discipline is unnatural whereas habits are instinctive. Remember, we are creatures of habit not discipline. I'm convinced that when you have wealthy habits for a long enough period of time, you build wealth. This also works if you have a substantial income or sudden windfall.

In some respects, you don't really decide your future. You decide your habits, and they decide your future.

Habitual Frugality - Frugality can mean different things to different people. What's frugal for Oprah is remarkably different from what's frugal for us mere mortals :) (seriously that was not a dig at Oprah... just an exaggerated example). My point is not to promote coupon clipping per se. If that is not your thing, please don't feel condemned. Frugality is about maximizing output for your input. If Thomas Stanley work has taught us anything, it is that most millionaires are indeed frugal but they are not necessarily first-cost sensitive. How good is your deal if it ends up being crap or you have to waste a ton of time to obtain it? Moreover, even many of those millionaires who don't appear particularly frugal are tremendously more productive with their incomes than most people. For more on this subject, read Toyota Millionaires vs. Mercedes Millionaires

Habitual Investment - Do you habitually pay yourself first? How so? Are you using savings accounts and c.d.s? How effectively do you leverage your income? Portfolio assets are nice, as are investment properties or privately held businesses, but is anything really infallible? Of course not! My point is I think we should all endeavor to become professional investors and educate ourselves accordingly. Regardless of which asset classes we decide to focus on, remember the wealthy often earn a great deal money through their assets. Not only does this make wealthy individuals financially free (independent), but this has important tax implications as well (at least for now). For example, consider the tax consequence having $4 million in unrealized capital gains in 2011.

The Laws Affect Your Wealth But Who Sets The Laws

Have you every heard of the golden rule? He who has the gold makes the rules. The fact that many of us live in democracies doesn't negate the impact money has on our respective legal systems. Let's look at Congressional wealth for a moment:

nearly half of Congressional members - 261 - are millionaires
55 have an average calculated wealth in 2009 of $10 million or more, with eight in the $100 million-plus range.
Members of Congress saw wealth jump by 16% between 2008 and 2009
In 2009, the median wealth of a U.S. House member stood at $765,010, up from $645,503 in 2008. The median wealth of a U.S. senator was nearly $2.38 million, up from $2.27 million in 2008.

My point is just because someone is "for the people" doesn't mean that they are "of the people." Many argue that several of the tax laws were made in favor of business owners, investors, and landlords. The truth is there are so many loopholes. Just last month, Kris brought everyone's attention to how Google legally uses offshore tax havens to shelter billions in revenue thereby minimizing their effective tax rate to a mere 2.4%. They are not alone.

I say this not to incite populist anger. After all, one would have a reasonable argument against double taxation in the first place.

Business owners not only provide jobs but also take the risks to build the companies, so this isn't as much as a criticism as it is an acknowledgment that the tax code can work in favor of business owners and those who generate income through more passive or portfolio means.Given that taxes are most of our single largest lifetime expense (we're taxed when we earn, when we spend, when we save, and when we die), getting a handle on taxes is prudent, and according to Thomas Stanley, this is one of the most popular activities among the millionaires in his surveys. So ask yourself, what tax professionals are on your team?

High Income

If you have a high income, regardless of source, then you have the potential (in most cases) to bank more of your income than someone who makes the median income. Of course, this assumes that you have your expenses under control. After all, regardless of whether you make $40,000 or $400,000 you can still be broke. In other words, that nice salary may not be enough to finance the life that you feel entitled to if that life style entails expensive private schools, exclusive neighborhoods, occasional shopping sprees, and extravagant vacations, etc.

For proof, please note that yet another Real Housewives castmate has filed for bankruptcy because she cannot meet her obligations on a mere $26,000 per month. Seriously, I personally feel for anyone going through financial hardships (regardless of fault). I bring this up not to deride her or pass judgment (I've made my mistakes too) as much as to show how $312,000 per year and some degree of celebrity cannot overcome jaw-dropping liabilities (debts equal to $19.8 million). Remember, it is infinitely more difficult to build sustainable wealth than it is to earn a high income. Still, it is easier to build wealth if your have a high income. The trick is making sure that you use at least a sizable portion of that high income to advance yourself and your family financially instead of just consuming it with lifestyle inflation.

Enjoy What You Do

It is so much easier to succeed financially if you actually enjoy what you do. Don't sell your soul to a soulless institution for a paycheck. This isn't to suggest being irresponsible by quitting your job and ignoring your financial obligations. I'm just saying don't lose decades of your life doing something you hate or staying at a place that you hate out of fear or some misplaced sense of loyalty. The institution does not love you back. You and you alone are charged with finding meaningful work... work that is an authentic utilization of your passions, personality, and skill sets. If you enjoy it and are competent, you will excel. Good people love recognizing excellent work. Anyone who doesn't is not worthy of your efforts anyway.

If you love what you do, you will never work another day in your life.

In aggregate, most millionaires are first-generation and did not get their money by accident. There are conditions, information, and laws that affect our financial positions, whether we acknowledge them or not. Don't allow yourself to aimlessly follow the path set in front of you. Embrace the habits of the wealthy, and improve your balance sheets today!