Why The Rich Get Richer

Everyone has heard the phrase “The rich get richer”, and that is a true statement in a lot of cases.  Most wealthy individuals have a particular mindset that not only allowed them to gain extravagant wealth in the first place but also to continue growing their assets as they accumulate more and more resources.  They also have the privilege of having the ability to buy expensive things that average out to be cheaper per unit time or per unit utility.  Let’s take a look at some of these things.

The wealthy may seemingly waste money on certain purchases from time to time, but if you take a closer look they are actually making a sound financial purchase.  For example, a $15,000 couch may seem gratuitous to most people.  If a normal person had $15,000 they would not spend more than $2,000 on a very nice couch in my opinion.  Let’s take a closer look though.  Well-made furniture is expensive for a very good reason.  Couches, chairs, carpets, and tables that are made well will outlast a person’s life, and it is often passed on to the next generation.  The biggest problem is the change of style over a large time period.  However, let’s say that the $15,000 couch lasts for 70 years.  That comes out to be around a measly $214/year to own the couch whereas the $2,000 couch will probably last 10 years at the most and cost around $200/year.  This case turns out to be pretty close in price, but the wealthy person enjoys a 100x fold better craftsmanship over a longer period of time. 

Another great example is something as simple as a tie.  A Hermes tie can cost upwards of $170 in some cases.  But again, these ties last forever.  The biggest problem is the person wearing it stains it while eating.  Otherwise, you can get one of the nicest 100% silk ties made for a very low yearly cost because they never wear out.  Not to mention that they are an absolute pleasure to tie because they are so smooth, yet the tie does not come undone.  Clearly I am a fan of these ties.  I have about 60 of them, so I am biased.  Other ties may be cheaper, but they will fray and are not as smooth to tie. 

These two examples are important because wealthy people can afford to lose a lump sum upfront to gain a cost advantage over a long term that a normal salaried person could not afford.  In most cases it either turns out to be cheaper per year or the same cost per year but get a nicer product in return. 

Another advantage that the wealthy have is the luxury of teaching their kids to think in terms of wealth.  Children of wealthy people grow up in a privileged environment whether their parents live extravagantly or not.  They are all but guaranteed to go to great schools throughout their life, but more importantly they have their parents present to teach them and allow them to make mistakes.  I am a living example of this.  I chose to go to UT Austin which is a great school, but anyone can go there if they work hard enough and it is not incredibly expensive by relative standards.  However, if I ever have a question about investments or market operations I can just call up my Dad and ask him.  If I have a question about why you would ever buy a 30-year Treasury bond when it is yielding a real negative return, I can call my Dad and he will tell me that the 30-year Treasury bond can be used as a tool to finance, insure, or use in complex investing structures rather than as an investment.   Where else in the world can you call an expert for free at any time of the day and get your small, sometimes trivial questions answered?  It is a huge advantage that wealthy children have. 

The rich get richer in this case because they have great opportunity for education.  In other cases they get richer because they find better long term value by finding a more expensive upfront cost.  A good education can take you very far in the finance world, and saving money in any area in life can lead to more investment gains by investing the saved money.  These are only two examples, but I assure you I could write at least twenty more well developed arguments for why the rich get richer.  This isn’t to say that only the rich know how to make money.  It is actually very easy to become rich and be part of the group that just gets richer.  I have written about dividends and opportunity cost in past posts, and one can see that becoming rich is nothing more than exercising financial discipline.  The biggest impediment to becoming rich is financial illiteracy. 

“My people are destroyed for lack of knowledge”

                -Hosea 4:6

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