Financial Gravity :: How the Rich Get Richer and the Poor Get Poorer
by Brian Lee. (Visited 6289 times) (23 comments) :: Print This Post
Posted: August 30th, 2007 under Personal Finance.
As someone who spent most of his 20’s in financial disarray, take it from me:
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it’s expensive to be broke!
Financial Forces
Have you ever been told that the rich get richer and the poor get poorer? Well, it’s true.
Several forces are at work keeping the money river flowing from the poor neighborhoods to the shiny houses on the hill.
Way of Thinking
As I discovered in my 20’s, the greatest financial force is our way of thinking (as discussed in See Money Differently to Attract More.) Being poor becomes a habit that you tend to repeat over and over. But your mentality isn’t the only thing keeping you down.
Poor Tax
To make matters worse, the economy is set up to add insult to injury when it comes to bad financial habits. There’s a huge societal tax on not having money.
The result is a different kind of gravity that keeps people weighed down on the earth when they’d rather be having fun, weightless among the stars with the rich people.
Financial Gravity
In order to break free from gravity, a rocket must expend a tremendous amount of energy in the initial stages of launch. As it inches away from the earth, the results of its efforts expand exponentially. Less and less effort is needed to travel larger and larger distances.
The principles governing financial gravity are the same. Most people will never escape the forces that keep them struggling. Some people try, but give up before it gets easier. Only those who understand the principles of exponential growth, financial gravity, and persistence will break free into financial orbit.
Components of Financial Gravity
Unfortunately, it’s just more expensive to be broke than it is to have money. Part of the reason the rich get richer is that they pay less to live. By having money, they can afford to buy ahead of time, in bulk, with cash, at a discount, and under tax shelters.
Sometimes they don’t pay anything at all for huge living expenses! They can afford to buy assets that increase in value instead of losing value. They get the luxury of enjoying the asset for a few years until they sell it for more than they bought it for.
Think of what happens when you take out a loan. A rich person who has extra money offers to lend it to you. As you make interest payments on the loan, that person is making money just because of the simple fact that they had it to begin with. You, on the other hand, are paying money just because you didn’t have it to begin with.
Credit Cards
Credit cards are the ultimate facilitator of financial gravity. By playing into the poor mentality of something-for-nothing, charging outrageous interest rates, and requiring ridiculously low minimum payments; credit cards have succeeded in keeping down the middle-class in the US during the greatest years of prosperity this world has ever seen.
The mentality and the system go hand in hand. The poor think that the only way to get ahead is to borrow. The system penalizes them heavily for this way of thinking.
Discounts
The rich don’t pay full price for anything. They’re always negotiating. It’s much easier for them because they come from a position of strength: they can pay with cash, they aren’t in a hurry, and they aren’t desperate.
I didn’t figure this out until I got interested in real estate. I read a book called Weekend Millionaire’s Secrets to Investing In Real Estate by Roger Dawson and Mike Summey. Roger Dawson is a negotiating expert who shares some of his techniques in the book.
Before I was introduced to Roger Dawson, I always looked at negotiating as dirty and dishonest. To me, it symbolized the rich taking advantage of the poor. What I didn’t realize was that I had the mentality of a poor person.
I learned that negotiating is the way economies work. Any market is a system in which buyers and sellers negotiate to determine prices.
Negotiating, at its highest form, is a process that rewards both buyer and seller with a creative exchange. A good negotiator likes to work with other good negotiators, just like a good football player likes to compete against other good players.
It’s a disservice to yourself and others to not know how to negotiate.
Once I got into the negotiating mentality, I started to save serious money. I made sure to always have options, pay with cash, and never be in a hurry.
The Rich Get Their Money Back
A poor person decides to take a ski vacation and spends a couple thousand dollars on lodging. A rich person buys a condo in a ski resort, rents it out for thousands of dollars a month, and vacations for free when it isn’t rented out.
The difference is enormous. In this scenario, the cost of vacationing for a poor person is thousands of dollars more than a rich person because the rich don’t like to spend money if they don’t have to.
People with money are always thinking about getting their money back. They don’t think of major purchases as purchases; they think of them as investments.
I’ve heard that the average millionaire drives a car that’s a few years old. They’re smart enough to let a new car depreciate before they buy it. They know that they’ll get much more of their money back when they sell a used car than if they had bought a new one.
Instead of constantly spending money on things and never seeing that money again, they try to park their money in an asset while they use it, and get their money back later.
Bank Fees
There was a time in my life when I didn’t keep any type of buffer in my checking account and as a result, I bounced several checks almost every week. When I look back on that time, I don’t know how I afforded NOT to have money. I was paying hundreds of dollars in overdraft fees every month; even though I didn’t have any money.
If I had simply kept a $100 buffer in my account, I would have saved thousands of dollars over the long-run. I thought that I couldn’t afford to keep a buffer, when in actuality, I couldn’t afford not to.
Volume Discounts
I learned about the value of buying in volume when I worked for an airline. I quickly realized that frequent flyers have a lot more opportunity to save money than the average traveler.
Someone who travels often on business can cash in their miles a few times year for a free vacation. The airline is much more likely to give them a free upgrade or treat them in an otherwise favorable way.
A person who can afford to buy a $300 President’s Club membership will enjoy free newspapers, drinks, and snacks every time they travel. It wouldn’t take too many trips to recoup their membership fees.
Business Expenses
People that don’t have money tend not to own businesses. Because they don’t own a business, they tend to pay more taxes than they otherwise would.
Business owners often find that many of their business expenses replace expenditures that they would have had if they weren’t self-employed. The bottom line is that they pay less taxes.
Opportunity Cost
The biggest cost of all for those without money is opportunity cost. If you don’t have money invested, you are missing out on interest that you would have made. If you don’t have money to take advantage of opportunities that cross your path from time to time, you’re losing money.
Take Responsibility
The message of this article isn’t to blame the system, it’s to inform you of how the system works so you can do something about it. The system just plays into the mentality. It’s more important to learn how to think like a rich person than it is to try to change the system.
Related Articles:
- Persistence Beats Technique Every Time
- Exponential Growth of Money and Success
- See Money Differently to Attract More
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