5 Reasons Why the Rich get Richer

It is very likely that you have heard or seen statistics that the rich in North America have been getting richer ever since the financial crises of '08/09. According to Forbes, the average income of the top 1% of Americans is just over $700,000 per year. This is about 13 times that of the average 99%, or about $50,000. Why is this the case?? Why do they make more money and sometimes pay less tax than the rest of us?? Well it turns out that there are good, justifiable reasons to why the rich get richer, the poor get poorer while the middle class slowly evaporates. It is interesting to note that most of the top 1% are an executive or manager (30%), doctor or in the medical field (16%), financial profession (14%), lawyer (8%), computer - math - engineering (5%), blue collar schmuck (4%), real estate guru (3%), entrepreneur (2%), and the list goes on. Also very interesting is that while many of the "poor" people resent the fact that the rich are rich, not even realizing that they helped the rich attain that wealth and status. So what do the rich do so well, here are five resons why the rich get richer: 

The rich save their money - As a rule of thumb, you should save at least 20% of your after-tax income (assuming you want to be wealthy). Don't believe me, just ask the rich. Many people think that because the rich are wealthy, they spend their money extravagantly. This cannot be further from the truth. While it is true that they spend some money on materialistic thing, it is miniscule compared to their income. Moreover, they never go overboard or get into debt for something. All self-made millionaires have learned how to control their desires, and as a result, their wants are in line with their incomes. Never do they spend beyond their means. A nice car may be purchased, but it is done so with money that was saved up. Two-thirds of "wealthy" households purchase used cars. They may purchase brand name clothing, but do so only when they are on sale. 

The rich devote time to learning about their finances - The rich read finance books and learn about how the financial system works: stocks, bonds, real estate, CD's, credit cards, interest rates, and the many different wealth vehicles and how to use each of them to their advantage. They take courses and devote time to the subject. This is very important since wealth can disappear very quickly if not protected. Think of the financial crisis of 2008/2009: millions of households lost tens of thousands if not hundreds of thousands of dollars in an extremely short period of time. However, many of the wealthy made money during this time since they had the capital to pickup assets for cheap. In addition, many that studied the markets realized that a housing bubble was forming and their investments before they collapsed, ultimately shielding them from the crisis. Over the last six or so years, Americans lost trillions of dollars, however, much of the money was lost by the middle and lower class. The rich knew or were advised to sell certain assets and protect their wealth.
The rich find ways to save money on taxes - The rich devote time to learn about how they can save money on their taxes. This is why many of the top one percent pay less tax than you and I. For example, many tax laws are written to encourage investing in stocks. Therefore, income earned from dividends are taxed at a very low tax rate. The wealthy ensure that much of their income comes from these assets. Hiring an accountant to find loop-holes and tax laws that they can take advantage of. Owning a business is also very tax efficient, hence the reason many wealthy people own them.

The rich leverage their money - The rich are very good at leveraging their money and purchasing financial assets (real estate, businesses, etc.) that give them returns. I know many people who are leveraging their primary residence and purchasing an investment property. While this can pay off in spades, it does have considerable risk. Research areas where property looks like a bargain and always ensure that the investment property has positive cash flow. If the property cannot produce a positive cash flow, move on.
The rich diversify their financial assets - The rich do not tie up all of their money into one asset. The US real estate collapse beginning in 2007 was a brutal reminder of why not to tie up too much money in your primary residence. Think of how many boomer Americans almost had their house paid off, only to have it drop anywhere from 15% to 70% in value. Canadians (primarily those in Vancouver and Toronto should think about this carefully). Ideally, you should think about having many different assets in different currencies.

So the next time you hear a statistic, remember that many of the rich have sacrificed things to get where they are. Many have worked extremely hard in school to get to where they are. So the question is, why do we resent them?? Why do the bottom 90% of people have no desire to learn about how money is created?? Why do the poor get poorer?? So I invite you to write a comment or tell me if you think I am wrong and why... Next post I will discuss 5 reasons why I think the poor are getting poorer.