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Why the Rich get Richer and the Poor Poorer

December 26, 2009

How come people who make more money seem to get rich so MUCH FASTER and the poor just seem to stay poor or worse?

An excerpt from http://en.wikipedia.org/wiki/Wealth_condensation: “Cost of living is typically the same for everyone. In a free market economy, factors contributing to the cost of living will adjust so that poorest members of the society are forced to spend all their income on bare necessities (food, housing, medicine), whereas richer members will have enough excess income that they can save and invest. Thus, in a free-market capitalist economy, both savings and the investment income …are disproportionally accumulated in hands of wealthiest individuals.”

Looking at real life: If you compare three people’s income (100k, 60k, 30k) you’ll find that their expenses are not proportionately different. If you earn 100k in income, you might spend 60k in expenses, if you earn 60k, you might spend 50k in expenses, and at 30k, you might spend 29k. Why this is so important is that the first person saves 40k a year, the second person 10k, and the third 1k. This is enormously different. At 100k vs 60k, one is earning just 1.66 times more income, but they’re have 4 times more income left over at the end of a year – they’re accumulating wealth at 4 times, not 1.66 times. And compare 60k to 30k and the difference is even more staggering: earning 2x more money but having 30x more left over at the end of a year. That is one of the single greatest arguements for the importance of increasing ones income: if you don’t, your expenses will eat all your income. Of course, no matter what income you earn, you can still manage to spend it all. But using this example, a 100k earner saves more in 5 years than a 60k earner in 20 years. Add to that fact opportunities to invest and compounded interest in real estate, stocks, or a business.

So the answer: the disparity isn’t income. The disparity is money left over after life expenses.

How do you accumulate wealth twice as fast?
While saving money is highly useful, it’s hard to trim 10k off your expenses.

The next step: If you’re that 60k/yr earner, and if you got a part-time job that made you another $800 a month over the next year (9.6k), while that’s only a small increase in income, that’s the equivalent accumulating an entire extra year worth of savings (9.6k in addition to the 10k left over at the end of a year).

In parting: If you feel yourself putting up resistence to the idea, do a cost benefit analysis. Is making that extra 9.6k of money harder than working nearly a full year of your life? And, who said you had to work harder? People who accumulate money have the same number of hours in the day as everyone else. In fact, it’s quite likely they work less. They are more creative and effective and frequently choose ways to make money that don’t correlate to how much time they must spend.

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