Why do the rich stay rich and the poor stay poor?
A complicated question that can be summarised in a few limiting beliefs and principles.
Sensationalism overshadows the true paths that people become wealthy
Most people love the ‘rags to riches’ story. Someone from nothing finding their way into incredible success and having fame, money and everything they wish. These stories sell like crazy. Everyone dreams of having that 1 breakthrough into good fortunes.
The reality? Very few people become successful this way. In a world with 8 billion people, maybe a few thousand suddenly became successful. And even within those thousands, most of these would have actually had a lot of work done in the background that went unnoticed, until finally they went big.
So how do most people become wealthy?
By generations and generations of slow, continuous improvement. I.e. your grandparents did well to enable your parents to do slightly better who in turn enabled you to do slightly better and so on. This works by passing down experience and wisdom and enabling better opportunities via networks created, some of which could be family, others through friends and work.
Take Warren Buffet. A clear genius in investing and improving companies’ profitability. However, he was fortunate enough to have connections with other well off families that quickly invested in him once they realised his talents. That’s not to take away his brilliance. He would have probably improved his situation significantly regardless of which wealth class he was born in. But if you are born middle to high class, and then you are a genius with money, then you become super rich. If you are born genius in a poor class, then maybe he would have only reached middle class and opened up opportunities for his kids.
It’s not fair that it is easier for the rich to make money but there’s no other way
Unless you want all wealth to be redistributed to the world upon death, which would cause all sorts of problems, it’s inevitable that it will be easier for rich people to stay rich and harder for poor people to get rich. You can complain about it, or you can use it to free yourself from the expectation that you are either poor or rich and that you can’t improve your situation continuously.
It makes me so disappointed when people say or comment things like “The rich are to blame for X, Y or Z” or what is common in my birth country “If you are successful, then you must have cheated through life or part of the mafia”.
Are there bad rich people? Yes. Are there people who became successful by cheating the system, violence and abuse? Yes. Is it easy to do that? Absolutely not. This is another form of sensationalism. The few groups who become wealthy via corruption, violence, and abuse get a lot of media attention because drama sells. But the reality is, that in many countries – it is not easy at all to become wealthy this way. It is much easier to do it legally. But those that do it legally do not get any publicity and stay in the shadows.
But the rich don’t get taxed enough
The rich get taxed a lot more than poor people. In most countries, the %rate is significantly higher once you start earning above certain thresholds. Yes rich people find loopholes, but they still pay a lot of taxes. If rich people don’t make smart decisions with their money, they will lose their wealth very quickly. People often confuse inflation to be a thing that negatively impacts poor people more. It has more detrimental effects on a person per person basis but overall in the population, inflation is a method to redistributing wealth. If a poor person has monthly expenditure of $1000 dollars, and prices rise by 10% due to inflation. That poor person may struggle to get the basics due to the $100 rise.
A rich person on the other hand, who may have $100,000 monthly expenditure for example. Would start paying $10,000 more due to inflation. Now, they won’t struggle for necessities because they can still afford them, but if they don’t manage their money well, inflation is one way rich people can quickly lose a lot of wealth.
You might say, why do I care? Because even though you need money to make money, it is also easier to invest a small amount of money for a big return then to invest a lot of money for a big return. What I mean is that someone who is poor could say learn a new in-demand skill like programming for example and go from earning $20k a year to $60-100k+ a year. And if they manage lifestyle creep properly, their monthly expenditure may only go from $1000 to $1300 say. Now inflation is having a much smaller effect than on rich people, but that extra income can be invested to further increase your income.
Investing $10-20k a year to make bigger returns is easier than investing $1-2m. You usually benefit from tax protected accounts and can manage the money easier. E.g., if you buy a house worth $100k, renovate it within the family and then sell it for $140k to make say $30k profit, that $30k profit is massive for you. However, if you need $2m to invest, the workload to buy twenty $100k houses and renovate them becomes a massive job. Of course, you could buy 1 house worth $2m, but then there is also relatively higher risk and harder to increase its value by 40%.
Buying a house? I can’t even save enough to pay my monthly bills
This is the situation for a big part of the world. It will not change in the near future. Your only way to get out of this situation is to do the extremely difficult of managing your expenditure to be minimal, not using debt to purchase depreciating assets and investing the money into what will increase your income the most.
For a lot of people, investing in anything other than themselves is a waste of time. Even if you are as good as Warren Buffet in investing, if you only have $5000 to invest and no rich contacts, making 20% a year versus the average of 7-10% (which is incredible) won’t make you rich for decades. But if instead you invest in yourself so that you go from making $20-30k a year to $100-150k a year, then you will massively change your life around.
The truth is that most people are not able to do the sacrifices and avoid the temptations whenever they start making more money. Therefore even if their income increases, their wealth stays stagnant. The positive thing here is that there are enough rich people who also suffer from the same, that many of them do actually go broke. This creates opportunities for others and the cycle continues.
Why most people won’t become rich
The world is set up in a way that only a small percentage will become rich. The rest will compete for breadcrumbs and while that is not fair, it keeps the world developing at a higher pace. Human psychology is such that without the carrot on a stick, we become lazy and stagnant. While it is possible to make the gap between rich and poor a little smaller, the chances of this happening in the near future is small because people only complain about the rich while they are poor. As soon as they become wealthier, the tune quickly changes. Why? Because becoming wealthier is extremely hard and anyone who has managed it, isn’t going to want to give handouts to people who are not willing to put in the work themselves.
Of course there is a lot of generalisations in the above and yes poor people get discriminated by the systems, especially when it comes to health and basic needs. There is no argument there. But again, if you blame everything on society rather than use the anger to fuel your ambition to improve your situation, then people will not care, regardless if you are right or wrong.
How can I invest in myself
Learn a high demand skill that pays well – Programming, AI, Blockchain, sales, marketing. It’s not easy but it is doable.
Most people want to do something and go from making $20k a year to being a millionaire. That doesn’t happen. If you are making $20k a year now, then you find how to double your salary to $40k without lifestyle creep. Then to $80k, then to $160k. This is possible within a couple of years and will change your life more than any stock/crypto/estate investment advice ever will. Once you have money to invest, then you can learn those skills.
