The 1 Thing That Makes the Rich Richer and the Poor Poorer
Today will be a short post, but good food for thought. I’ve been on call for the last week and things have been pretty busy, leaving me little time to write.
Have you ever asked yourself if there is one thing that makes the rich richer and the poor poorer? If you do a google search for this you will find a number of different reasons:
- Changing from defined benefit plans to defined contribution plans
- Political policies
- Tax policies
- Education disparity
The list could likely go on and on.
One day while I was driving and thinking about finances (shocker) and people’s financial behaviors, I had an epiphany. I think the one thing that consistently makes the rich richer and the poor poorer is . . . interest.
Now, I’m not claiming to be the first person to make this breakthrough discovery. As I’ve read and researched more on this, of course there are other people that have had similar ideas. But that one day while I was driving it really kind of hit me like a bolt of lightning. Interest is one simple thing that can really help you or really hurt you financially.
Interest is extremely powerful. It is how your money can make money for you, through the miracle of compound interest. Conversely, it can also work against you slowing your escape from the shackles of debt.
If you read other blogs or finance books, you may have come across this quote from J. Reuben Clark, an early leader in The Church of Jesus Christ of Latter-Day Saints. Since I am a church member, I have heard this powerful lesson on interest many times throughout my life:
“Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels . . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.” -J. Reuben Clark
Let’s look at the general behaviors of the rich with respect to interest, and contrast that with those of the poor.
I should clarify that in this context when I say “the rich,” I mean those that are acting more financially responsible and trying to build wealth. And when I say “the poor,” I mean those that are acting less financially responsible, and thus will never build wealth. It has nothing to do with how much money people make or their socioeconomic class. It’s not my intention to try and create some type of social or economic inequality. Likewise, I don’t want to cast a negative light on anyone that is in need or needy, as this can happen to all of us at any point in our lives.
With that, let’s make some comparisons.
The Rich
- The rich earn earn interest, they do not pay it. This is how they build wealth and become financially independent.
- The rich invest their money in assets that will earn them interest, such as stocks, bonds, real estate, and businesses.
- The rich are more focused on saving and investing, than on spending and consumption.
- The rich live below their means and save and invest the difference, earning them interest.
- The rich are more financially focused on the future than today.
The Poor
- The poor pay interest to others, they do not earn it. This prevents them from building wealth and becoming financially independent.
- The poor have debts that force them to pay interest to others, like credit card debt, auto loans, student loan debt, and a home mortgage.
- The poor are more focused on spending and consumption, than saving and investing.
- The poor live beyond their means, incurring further debt, forcing them to pay more interest.
- The poor are more financially focused on today than the future.
Self Evaluation
Of course, this is not a strict dichotomy. You aren’t just rich or poor based on these criteria. I just recently finished paying off my student loans and still have a home mortgage, does that make me poor (financially irresponsible)? I hope not.
I think it is more of a question of which direction we are moving in. It is not a static position.
Ask yourself, what category do my behaviors fall in? With my current assets and liabilities, am I earning more interest or am I paying more interest? If you are earning more than you are paying in interest, keep up the good work. If you are paying more in interest, it’s time to make some changes.
Conclusion
I believe, at a very basic level, the one thing that makes the rich richer and the poor poorer is interest. The rich earn it, while the poor pay it. Take a self inventory of your own finances and do an honest assessment of where you stand, and if needed, start making some changes today.
Thanks for reading. I hope you are doing well in your progress towards reaching FI. If you have any questions or comments that might help other readers, please list them below. In the meantime, keeping working towards Freedom Through FI!
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