Why Do the Rich Get Richer?

If you want to know why the rich get richer, the answer was written down a few thousand years ago in what I consider to be the single most useful verse in the entire Bible.

“My people are destroyed because of a lack of knowledge”

When it comes to getting rich, the rich get richer because they have knowledge about money.  They understand how money works.  They understand finance.  They understand tax laws.  They understand what drives profitability. When the rich get richer, it is a symptom of their behavior, not the cause of some great cosmic mystery.  Trying to figure out why the rich get richer is like trying to figure out why athletes get in better shape over time or why painters become more skilled with each passing year. As Aristotle said, “We are what we repeatedly do.  Excellence, therefore, is a habit.”  The “rich” are those who bring in more revenue than they let go out the door so that the difference – the surplus – gets added to their net worth each year.
To put it more starkly: If you gave me total control over the finances of a young married couple around 25 years old, a police officer and a teacher, I’d be willing to wager a significant amount of money that I’d be able to get their net worth into the tens of millions of dollars by the time they retired at 65.  Why?  Because it took me about 5 seconds to calculate and solve for the “payment” variable of a net present value of an annuity formula assuming a return of 10% to calculate that it would require saving $22,600 per year.  With most decent employers, at least $2,600 of this would come from matching funds on retirement accounts so we’re now talking about $20,000 annually.  Saving that amount in the 25% tax bracket will lower your Federal taxes by $5,000, which effectively counts as the government transferring money from your tax bill to your balance sheet.  That leaves $15,000 in out-of-pocket cash that the couple would need to save.




In other words, what I see is, “If I can figure out how to get them to put aside $1,250 per month at 10%, they will retire with $10,000,000 in cash.  That should generate at least $400,000 a year they could spend without ever touching their money and give them a couple of decades together traveling the world.”  If the couple were willing to wait until they were 75 to retire, you’d be talking about only a few hundred dollars a month in required savings to hit the same $10,000,000.
 

That is why the rich get richer.  Most people don’t have the knowledge to calculate that themselves.  Yet it is in libraries, online, in bookstores, and universities throughout the entire world, available for the taking. Quick!  If a friend walked up to you and said, “I save $500 a month and earn 7% on my investments.  I am retiring in 32 years.  I want $2,000,000.  Am I going to hit my target?  I already have $51,000 saved” could you answer him?  It should take less than 10 seconds. ¹
That is why the rich get richer.
 But let’s face it – when you can walk into a store, buy whatever you want, and not worry about the consequences, you are rich.  Anything after that is merely a scorecard.
So stop blaming Congress.  Stop blaming the President.  Stop blaming the corporations.  The rich will always get richer because they make different decisions than people who are not rich.  If you redistributed all the wealth so everyone started out with exactly $100,000 and no debt, within 10 years, most of the money would be held by a small handful of people because they behave in a way that maximizes resource accumulation.²
The rich get richer because they think about, study, and work toward making money.  How much time do you think the average person devotes to understanding accounting or the tax advantages of deferred variable equity linked annuities versus Simplified Employee Pension funds?  Not much.
But … say it with me … that is why the rich get richer.

Source: Joshua Kennon