The Rich Get Richer

The Rich Get Richer

Almost everyone of at least a certain age has heard the phrase “the rich get richer and the poor get poorer.”  It’s absolutely true.  It’s true for two reasons.  First, rich people buy things that appreciate in value, while poor people buy things that depreciate in value.  Closely tied with the first item is the second.  Income gets taxed while appreciation on assets does not.

I know a lot of poor people with a lot of cool stuff.  Stuff that depreciates in value rather quickly.  I know some rich people, and they also own a lot of cool stuff, but it is stuff that appreciates in value.  The poor person buys a brand new car on credit, or leases it, while the rich person invests their money.

The poor person pays interest on an asset that decreases in value, while the rich person buys things that pay interest, dividends, and rents while increasing in value.

The poor person throws away their wealth building potential, their income, on things that burn away.  The rich person invests and gets a return that multiplies.

It is not really a poor person, though.  It is a poor train of thought.  Unlike what a certain political ideology tells you, the fact is, anyone can become wealthy.  It’s not some golden ring just out of reach, it is a set of habits that insures that your future will be better than your past.

You can have a huge income but not be rich.  How?  Well, if you spend it all on things that lose value, what you had will disappear.  Even a small change in the right direction will have a huge effect over time.  When you trade out depreciating assets for appreciating assets, a multiplier effect takes place because the wealth you gained from appreciation will also start appreciating.  Eventually, you will earn more on untaxed appreciation than you will on earned income, which is taxed.  That is how wealth is built.  That is how the rich get richer, and how you become one of them.

The thing is, you don’t have to start out with much money.  The easiest thing to do is to contribute to your 401k if you work for a company that offers one.  Put the money you contribute into an index fund that has the lowest fees possible.  If you don’t have the option of a 401k, you can still get an IRA through a bank or online investing service.  The key is to invest your money into an index fund that follows as much of the stock market as possible.  You’ll probably have to start with at least $1,000 but if you turn your thought process around from spend to save, this will happen fairly quickly.  A no load index fund with low expenses is where to start.  The company Vanguard is the best at this.

This information is not mine.  This information is just a small nugget of information from the book The Millionaire Next Door, but with my own little thoughts to go with it.  The idea I want to put across is that you don’t have to live paycheck to paycheck forever, with no hope.  Not having a safety net is insane when so many companies are downsizing through automation, or sending the work overseas where it is cheaper.  Most likely, only a few of my friends will read this, but I want all of my friends to be prepared for problems that inevitably occur.