Why The Rich Get Richer

According to the chart below as of 2009 if your household income was above $380,000 annual, you were considered part of the elite 1%.  The 1% net worth according to the Fed data was nearly $8.5 million, that’s 70 times the median household’s net holdings of $121,000.

In this blog I will share my thoughts on why I believe the rich get richer, the poor get poorer and the middle class keeps shrinking. I will also suggest some ideas on how we might be able to join the elite 1% or decrease that number and widen the gap. Because let’s all face it, living paycheck to paycheck is not fun.



 The reason I decided to write this blog was because I read an article online that said “The richest 1% is about to own more than everyone else”. Reading headlines like this one makes me so upset and it’s not because I resent the rich. No, I actually want to join their side. It’s their fault that they are rich, and it’s our fault that we are poor. They were taught about money and most of the other 99% were not. I also want to help educate as many people as I can on this journey to financial freedom. Together we can better ourselves and make a difference. Of course not everyone believes in wealth, but if you do, keep reading.

Broke people constantly buy things. Their house and car are full of stuff, stuff that sometimes goes unused or maybe they don’t even remember why they bought it. It’s paycheck in, paycheck out. By doing this, they deplete their cash flow. Most likely the unnecessary purchases are going to the 1%, who will gladly take their money and create more wealth for themselves. The world has adapted a consumer mentality. We all want the latest and greatest (myself included). You buy a phone now and in 2 years it’s no good anymore, so you go ahead and buy another one. New big TV came out? You buy it. In this lifestyle, there is always more month left at the end of money. 

The middle class buy liabilities like cars, boats, houses, and credit card debt. They buy that nice car that in return will cost an average of $600 a month including loan repayment, gas, insurance and maintenance. Want go on a vacation? Let’s swipe the credit card. If money gets tight, they start paying the bare minimum and racking up debt by compounding the interest, making it very difficult to pay it back. Some people can have credit cards, others need to learn how use them. They buy vacation homes that are only being used 20% of the year. That home could be an asset if they rented it out for the rest of the time when it’s empty. Eventually they end up spending equal or more than they make.

Rich people acquire assets that produce cash flow. For example stocks, bonds, real estate, and education. The rich receive their money and buy an income property, which generates them income or more cash flow. Then they buy another one, and so on. They also invest in stocks that generate what they call dividends. Dividends are a percentage of a company’s earnings that they pay back their shareholders. Education is another asset. If you learn how to do something that generates more income then it’s an asset. The rich also use the powerful formula of compound interest. For example, if you take $1000 right now and put it in an Index fund like the S&P 500 and add $500 to it every month, that money will turn into $201,049.02 in 20 years, assuming that you are getting a 5% yearly return. The S&P average return in the last 10 years is 7.71%. At this rate you would end up with even more money.

There is a story about two guys playing golf, it goes like this; Before they started their round they made a bet to play for $.10 a hole. Realizing that this is not a lot of money, they decided to double after every hole. The 1^st hole $.10, 2^nd hole $.20, 3^rd hole $.40, 4^th hole $.80, and so on. This is still not a lot money right? Fair enough. Guess how much they were playing for when they got to the 18^th hole? A whopping $13,107.20. Compounding is very powerful, use it for your advantage. Compound your savings by investing it.

These are just some of the facts about the different financial classes and why they are where they are. I could go on and on about this, but then I’d have to write a book. Now you may be asking yourself, what can we do differently? How can we achieve financial freedom?

·         Stop wasteful spending- Love that caffeine in the morning? That Starbucks could be costing you over $800 a year. Eating out could be costing you thousands a year.

·         Create a budget- Create a budget and stick to it. Use the envelope system.

·         Pay yourself first- That’s right, pay yourself when you get paid. Start a retirement account and contribute at least 10% of your income to it. If you have a match 401K through work, make sure you contribute at least the amount they match. If not you can still contribute 10%.

·         Give back- Help someone that can’t repay you. It’s gratifying and you will be rewarded more than you know.

·         Buy assets – Buy things that will generate income, such as stocks, income real estate, bonds, start your own business, educate yourself about something you love but don’t know much about, and so on.

·         Don’t buy too many liabilities – Cars, boats, motorcycles, or a house. Anything not generating income is a liability. A house can be an asset though, and buying a house is important because we need a place to live.

·         Minimize the giving back to the wealthy program, They already have a lot of money so we need to think about our purchases. Do we really need 40 pairs of shoes?

The above are only some of the things we can do to better ourselves, but you get the idea. We really need to start thinking about the future. We need to insure that our families are taken care of. We need to stop blaming politics and the wealthy, I know that there are things they could do to help, but will they? Probably not, and after all we are where we are because of the things we have done in the past, so we have to take matters into our own hands and take control of our finances. We need to keep the money within the 99%, and not hand it all back the 1%.

In conclusion I’d like to say that we have to minimize our spending, eliminate debt, and maximize savings and investments. The formula doesn't get any easier than this. Tax season is upon us. What are you going to do with your refunds? Have a great day.