There’s (surprisingly) even a Wikipedia page on it with background and details.
Here are some of the highlights:
“The rich get richer and the poor get poorer” is an aphorism due to Percy Bysshe Shelley. In A Defence of Poetry (1821, not published until 1840) Shelley remarked that the promoters of utility had exemplified the saying, “To him that hath, more shall be given; and from him that hath not, the little that he hath shall be taken away.”
The rich have become richer, and the poor have become poorer; and the vessel of the State is driven between the Scylla and Charybdis of anarchy and despotism.
“To him that hath” etc. is a reference to Matthew 25:29 (the parable of the talents, see also Matthew effect). The aphorism is commonly evoked, with variations in wording, as a synopsis of the effect of free market capitalism producing inequality.
Ok. I guess there’s officially a Wikipedia page on everything in the known world these days. But I digress.
Generally I’ve heard the phrase used to express exasperation that (for whatever reason) the rich are getting even richer (and at a faster pace) than the rest of us.
I may have even used it myself in my earlier days, though I can’t remember it for certain one way or the other.
For most of my life I didn’t really think of the phrase much. I didn’t really associate it with me or my finances in any way.
But it’s been on my mind lately as I look back on my life and see it’s clear that the rich do get richer.
So I thought I’d cover the issue here, first by seeing what others say on the subject and then sharing my own thoughts and experiences on it.
Let me say that before I get into the post that I realize I’m treading on thin ice.
Wealth inequality is a big and growing issue in American politics and economics.
I want to remind all readers that this site is not about politics or economics and I’m not discussing wealth inequality in this post. If you’d like to debate that issue, I’m sure there are plenty of blogs that discuss it.
I’m simply looking at a popular (or at least well-known) phrase that has to do with money and trying to explain why it’s valid.
I’ll leave the politics/economics of wealth concentration for others to cover.
Google and the Rich
I started my search for an answer at (where else?) Google and typed in “why do the rich get richer”. I’ll be highlighting some of the top search results to see what they say in response.
We’ll begin with a couple videos.
This one from Valuetainment lists 10 reasons why the rich keep getting richer:
That said, they did have some interesting stats on how wealth is distributed. The division of American land graphic was especially eye-opening.
Anyway, their list of ten includes the following:
- Exponential growth
- Long term thinking
- Regret minimization
- Specialized skill
- Maximization of wealth
- Family wealth transfer
- Tax strategy
It’s hard to argue with any (or at least most) of these, but then again they seem a bit vague and hard to grab onto. Kinda touchy-feely. I prefer more concrete ideas and examples personally, so I kept looking.
Next is a video from Practical Wisdom:
The first part is what I had Googled and the last part sounded oddly familiar.
The book has seven steps to becoming wealthy while the video lists five, but they are the same basic principles.
That said, this video (and the book) are less about “how the rich become richer” than they are about “how anyone can become wealthy.” They cover solid money principles that anyone can apply to improve their finances and are certainly not limited to (or even targeting) people who are already wealthy.
In other words, it doesn’t really answer the question either.
So I moved from videos to articles.
Unfortunately I didn’t have much luck here either. I only found one that got to the heart of my question.
This post from CNBC says it’s true that the rich get richer and details why as follows:
The wealthiest 1 percent put three-quarters of their savings into investment assets. By contrast, the middle class had 63 percent of their assets tied up in their homes, with home equity accounting for about a third since they have large mortgage debt.
Wolff found “striking differences in returns by wealth class.” The top 1 percent earned an average annual return of 5.91 percent between 2010 and 2013—far more than the 3.27 percent earned by the middle three quartiles. And that was due mainly to having more exposure to the stock market.
“The differences reflect the greater share of high-yield investment assets like stocks in the portfolios of the rich and the greater share of housing in the portfolio of the middle class,” Wolff said.
In other words, it boils down to the facts that:
- The wealthy have more assets (which is why they are deemed “wealthy” compared to others, by definition they have more)
- As a result, they have surpluses to invest in higher performing assets (like stocks versus housing)
- By investing in these assets, the rich become richer
The rest of the top articles were more like the second video highlighted above: they listed steps people could take to become wealthy in the first place (things like earning a good income, controlling their spending, staying away from excessive debt, investing for the future, etc.) Those are all well and good, but they don’t really address why people who are already wealthy become even wealthier at a faster rate.
But I think I have some ideas about why this happens…
Five Ways the Rich Become Richer
Based on both my life and observations, I think there are five key ways that the rich become richer.
All of them are a function of the following:
Most wealthy people have applied solid financial principles over time, accumulated wealth above the norm, and have placed themselves in a position to take advantage of their wealth to make it worth even more.
That said, here are the five ways the wealthy use their assets to become even richer:
1. They take advantage of compounding.
Here’s an easy math question:
Which will earn more at a 10% return rate — $5,000 or $50,000?
BTW, I’m using 10% to make the math really easy, so don’t get your shorts in a wad wondering (or asking) where someone can earn 10% guaranteed these days. I use 8% in my personal estimations, but I figured 10% made the calculations super simple for all. The principles are the same no matter what return rate you use.
I think we all know the answer but in case there’s someone who thinks this is a trick question, let’s spell it out:
- 10% return on $5,000 is $500.
- 10% return on $50,000 is $5,000.
- $5,000 is more than $500.
- Hence you earn more with $50,000.
Basically, the wealthy have a larger levels of assets which then earn larger amounts each year.
Then these increasingly larger amounts earn increasingly even larger amounts year after year after year, compounding until the difference is massive.
Let’s look at the examples above over time. Here’s what each of them is worth at 10% return:
- After 10 years, $5k is worth $11.8k while $50k is worth $118k
- After 20 years, $5k is worth $30.6k while $50k is worth $306k
- After 30 years, $5k is worth $79.3k while $50k is worth $793k
- After 40 years, $5k is worth $206k while $50k is worth $2.1 million
It’s easy to see how the compounding of large assets makes the rich even richer. In this example, they become $2.1 million richer than they were 40 years earlier and $1.9 million richer than the poorer people who started with only $5k.
2. They have surplus funds to invest.
The above example is only based on an initial investment sitting and compounding for 40 years.
But it’s also likely that the wealthy would have more excess funds each year to add to their investments. They are, after all, wealthier, so it’s easy to assume they have more to invest each year.
Let’s take the numbers above and add to them as follows:
- One person starts with $5k invested and adds an extra $500 to it each year.
- The other person starts with $50k invested and adds an extra $5,000 to it each year.
They both add 10% of their initial investment each year, so the savings are proportional. Yes, you could make a case that the wealthier person would have a disproportionately higher level of savings, but let’s ignore that for now — these numbers alone will make the point. Just know the difference could be even more.
If they both earn 10% on their money annually, here’s where they end up over time:
- After 10 years, the $5k start/$500 per year is worth $19.8k while the $50k start/$5,000 per year is worth $198k
- After 20 years, the $5k start/$500 per year is worth $59.2k while the $50k start/$5,000 per year is worth $592k
- After 30 years, the $5k start/$500 per year is worth $162k while the $50k start/$5,000 per year is worth $1.6 million
- After 40 years, the $5k start/$500 per year is worth $427k while the $50k start/$5,000 per year is worth $4.3 million
See how much the difference is now? The rich are even richer! And as I said earlier, that $5k per year they saved could easily be $10k or more, making the difference even greater!
3. They earn higher rates of return.
This is covered in the CNBC piece above, but I wanted to expand on their thoughts.
I know that when I had little to invest, I guarded it closely. It wasn’t much to wealthier people, but it was a lot to me and important to our finances, so I wanted to protect it. As such, I was cautious in my investments. I was limited in them as well by both the amount I had to invest and my own willingness to take risks.
As my assets grew, I loosened up. I was willing to take more risks with my money because I had more and any given amount wasn’t as important to me as it once was. If I lost it, it wouldn’t kill me. Hence I risked more and was rewarded with higher return rates.
I still wasn’t reckless in my investments but just willing to dial it up a few notches.
Think of it this way:
- Most people start with their homes as their primary asset (as CNBC notes). This might earn them 3% gains over the years.
- As they accumulate more, they invest in a combination of stocks and bonds and earn closer to 5%.
- As this grows they are comfortable with risking more in stocks where they might earn 8% a year.
- This grows into even more and they might branch off into real estate (like I did) and earn 10% in income plus strong appreciation.
- Then they might buy a business (also as I did) and earn 200% on their money in a short period of time.
In each stage, the rich got richer. As they did, they invested at higher rates of return, which then helped them become even richer.
Just to humor myself, I ran the numbers to show what a difference return rates can have over time.
Let’s just do a simple calculation of someone starting with $50k and no additional annual investment.
Here’s how much they would have at various return rates after 40 years:
- A 3% return rate would give them $118k
- A 5% return rate would give them $335k
- A 7.5% return rate would give them $902k
- A 10% return rate would give them $2.1 million
Big difference, right?
In addition to simply changing what they invest in, the rich can also increase their return rates by getting better deals on their investments.
For example, because I had cash in 2013, I was able to buy properties at lower prices than those who had to finance, effectively giving me a better rate of return.
Let’s say Jim was bidding against me and he offered $200k but the seller wasn’t sure Jim would be able to qualify for a loan. Or perhaps the seller didn’t want to wait in a skittish market.
But I had $185k in cash and could close, guaranteed, very quickly. The owner could easily prefer my offer (and did) because he knew I had the money and had it now.
My return was effectively $15k better than what Jim’s would have been. This in effect raised my rate of return. Because I was already wealthy I was able to invest to become wealthier.
4. They have opportunities that aren’t available to others.
Sometimes the wealthy have access to opportunities that aren’t even available to (or known by) those who aren’t wealthy.
Here are a few times this has happened to me:
- In real estate, I got deals (never mind they were at better prices) that others couldn’t have gotten simply because I had cash and they didn’t. So I was able to seize the opportunity and earn a good return when others weren’t.
- I was given the chance to bid on a business because I had cash available (most others didn’t get the chance because they didn’t have the funds). In addition, I was able to outbid some other worthy competitors because I had a substantial amount of cash and was willing to risk it. So I purchased Rockstar Finance for way more than what it was worth using any reasonable set of metrics — but still a lot less than what I thought I could make from it. I won the bidding, grew the business, and sold at a handsome profit.
- A friend of mine approached me to invest in his rental properties because he knew I was wealthy. To date I’ve been able to move $125k from earning 2% in a savings account to 10% with him. Sure, there’s more risk (which is why he pays more) but again it won’t kill me if I lose $125k, so I can afford to be riskier.
In addition to these I could list many examples of opportunities that I or others have had by networking. This is because wealthy people tend to talk about money, wealth, investments, and opportunities when they get together. This presents the wealthy with opportunities that others simply don’t get — and those opportunities are often quite lucrative.
5. They can strike when the iron is hot.
Warren Buffett famously said to “be fearful when others are greedy and greedy when others are fearful.”
A great example of this was the 2007-2008 crash that killed the stock market and most real estate.
But because the wealthy had excess reserves, they were able to be greedy when others were fearful.
This is when many poured millions into the stock market and bought real estate at bargain prices. Even though times were bad, they had assets to make these moves and could afford to risk them. Those with less assets tended to circle the wagons and pull everything out of the market and housing.
Now look at what has happened in the past decade. Because the wealthy were able to strike when the opportunity presented itself, they became even wealthier.
Here’s a video that highlights the five ways the rich get richer:
Rich Dad Poor Dad and Old Money
As I was winding up this post, I had just started re-reading Rich Dad Poor Dad for an upcoming review. In the introduction he makes the following statement:
One of the reasons the rich get richer, the poor get poorer, and the middle class struggles in debt is that the subject of money is taught at home, not school. Most of us learn about money from our parents. So what can poor parents tell their child about money? They simply say, “Stay in school and study hard.” The child may graduate with excellent grades, but with a poor person’s financial programming and mindset.
This makes a lot of sense to me. I bet many of you can relate as well — having parents who knew little about money management themselves.
That’s why I consider Dr. Thomas Stanley to be my “Rich Dad.” He wrote The Millionaire Next Door. I read it, I applied what he said, and I became wealthy.
Interestingly enough, Robert Kiyosaki, the author of Rich Dad Poor Dad has written a book titled Why the Rich Are Getting Richer which he calls “graduate school for Rich Dad students”. I’ll be checking the book out.
I’m also reading The Old Money Book and the sentiments in it are the same as in Rich Dad Poor Dad. In this case, Old Money parents do teach their kids about money — and since they know what they are talking about, the home education is quite successful at maintaining generational wealth.
Not Limited to One Method
A big reason the rich become richer is that they can use several (or even all) of the five points above to their advantage.
We’ve seen numerically that any one of the methods can help tremendously. How much more of an impact is there if they work together?
I know I have used all of the points above throughout my life, sometimes individually and sometimes a few combined for an even greater impact.
And if it’s clear that any one of these could make the rich richer, it’s even more obvious that used together they can grow wealth exponentially.
To wrap up, those are my thoughts on how the rich become richer.
Do you have anything to add? Did I miss anything?
If so, leave your ideas in the comments below.