Why Do The Rich Get Richer?
|April 30, 2012||Posted by Roshawn Watson under Uncategorized|
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.
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.
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?
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.
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.
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.
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.
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.
“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.
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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