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Why the Rich Get Richer & The Poor Get Poorer

The most common response to this quandary is that you need money to make money. Those born with a silver spoon in their mush’s are destined to be wealthy.

Personally I think that is complete tosh. I can even pick a carefully selected piece of research that ‘proves’ it:

In a study by the University of Kentucky of 35,000 lottery winners of Florida’s Fantasy 5 lottery they found that 1,900 went bankrupt within 5 years, that’s a bankruptcy rate of over 5%. This bankruptcy rate was approximately double non lottery average for the state.

This shows that having or acquiring large amounts of money is not necessarily an instant ticket to future riches, in fact it would tend to imply the opposite is more likely.

Sure, give me $1,000,000 today and I’ll guarantee you I’ll be richer than the me without the $1m in thirty years time. However I’ve got numerous examples from my personal array of friends that disprove this theory.

An acquaintance (seemingly a very intelligent chap) from uni that inherited several £m at the tender age of 20 is well on his way to having lost the lot by all accounts. Likewise I have several friends that have become real life  rags to riches success stories.

Perhaps the best example is my sister and I. We both grew up in a nice middle class family. Great educations, sensible parents, we never really wanted for anything but at the same time weren’t spoilt and didn’t start out in life with trust funds or massive handouts. Our respective financial positions now (both mid 30s) are very different. While I outstrip her in the earnings front by some margin (jobs can have a big impact on wealth creation), I am almost certain that she outstrips me on the expenses/spending front. When I think about it, that is bonkers and at the crux of the problem.

Education, education, education

I’m a firm believer that most peoples money problems stem from a lack of financial education/awareness/discipline. Quite frankly it amazes me that throughout all of my schooling I don’t remember ever being taught any of the real basics of personal finance.

In maths we never seemed to apply what seemed like abstract theories to real life situations. Surely schools should be teaching us all how mortgages really work (e.g. comparisons of renting versus buying, interest only v repayment etc) or how compound interest can make or break your finances or how expensive and damaging most personal debt really is, particularly when combined with excessive consumption.

It’s only when you understand these concepts that you begin to change the way you think about money. Once you get these things working in your favour, it’s amazing the speed with which you can build wealth. There are numerous examples in blogsphere of people who have done and are doing this but Jason over at Dividend Mantra is a classic case study.

I’ve lost count of the number of times I’ve read of people in the personal finance/financial independence community say that they only changed their approach to wealth building after they read some article/post/blog/forum post. Mine was a random article I read several years ago about the joys of overpaying your mortgage. Sure I was investing already but it was that article that made the compounding penny drop and encouraged me to start optimizing my finances and run my finances like a business.

These ‘lightbulb moments’ can and do have a huge impact on many peoples financial positions. They also prove that it’s not really about how much you earn or what you started off in life with but it’s actually more about your knowledge, mindset and actions.

And with that, in order to pay myself £423 per annum in perpetuity I am off to spend the bank holiday weekend filling in a pond. Enjoy the long weekend!

{ 17 comments… add one }
  • ermine May 1, 2015, 5:23 pm

    > Those born with a silver spoon in their mush’s are destined to be wealthy.

    It’s not without point, although the reason backs up the points you raise in the rest of the post.

    Winning the lottery (and its hand-maiden, inheriting a lot of cash young) is a really, really terrible way of getting the money to make money.

    Why? Because as well as money you need wisdom to make more. Old money teaches its kids about money, partly by living it and partly by disbursing it more steadily until some of that learning is assimilated.

    I’ve never been convinced that this is book-learning, it’s life-learning, and that is the job of the parents IMO to fit their children for life. My Dad was a fitter, so I’m not of old money, but my parents didn’t spend more than they earned, and that’s more than half the battle won. Beyond a mortgage and one stupid but manageable car loan in my 20s, I’ve never spent more than I earned – and I learned that from my parents.

    Only later in life did I add the knowledge of what to do positively. Coming into money suddenly, and young without experience is not a recipe for success – add no end of footballers to your lottery winners – they’ve often eared thousands of times more by 30 than I’d earn in a lifetime, but they can’t make it stick to the sides and end up broke.

    • Under The Money Tree May 4, 2015, 9:25 am

      The problem as I see it is that the vast majority of parents out there are financially illiterate and so are in no position to be doing the teaching as part of life learning. If there was more education in school I’m sure it would help, though I agree there is more to the problem than text book solutions.

      The only module at Uni I really learnt anything from was ‘Economic and Financial Decision Making’. There wasn’t much theory involved, it was more about discussing different ways to think about investments and how to structure your finances. It definitely changed the way I approach money for the better.

  • Dividend Drive May 1, 2015, 5:38 pm

    I agree. Financial education is so absent in the UK (and beyond!) that it is a wonder we are all not bankrupt. However, I do agree with Ermine: such education is best provided by real life experience which has to be–really–from the parents. That does not mean formal financial education is useless, far from it, only that it can only take you so far.

    I find it rather sad that people from wealthy countries make themselves poor by creating an environment in which money is so readily expended without thought. Always reaching for much more than they need then being upset they don’t get it. I call them “rich paupers” as they have made themselves poor rather than actually being poor. Hopefully this will change. But it will take a more general cultural change first, I fear.

    Enjoy dismantling the pond. Not a bad way of “earning” nearly £500 a year! It’s just the sort of task I enjoy!

    Thanks for the fascinating post. Thought provoking as always.

    • Under The Money Tree May 4, 2015, 9:31 am

      Dividend Drive,
      Rich paupers – i like that term. I agree it’s sad when you come across people like that and as you elude to it’s a culturally driven problem.

  • weenie May 1, 2015, 7:26 pm

    Wisdom is key! My parents were working class immigrants and were savers, enabling them to retire early and live a very fruitful life in retirement. In fact now, I see them spending quite frivolously but well why not, they have decent pension pots and good rental income coming in!

    Me and my siblings were savers too from a young age but I kind of lost the plot between my mid-20s-mid-30s and got caught up in credit card debt.

    I finally recalled what my parents had taught me and cleared all my debts by the time I was 40, although it wasn’t until 5 years later, that I had that ‘light bulb’ moment when I happened across MMM and the whole PF/FI blogging community.

    I’ve learnt so much over this past year and changed my attitude towards finances and although it’s not always easy to be frugal, I’m finding that I can still enjoy my life and save at the same time.

    I don’t have as much earning power as a lot of my friends but I do know that already that I’ll be retiring before they do!

    A lotto win would be handy but I’m not counting on it!

    • Under The Money Tree May 4, 2015, 9:39 am

      In my experience immigrants tend to offer some great examples of how to approach personal finances.

      When discussing a potential Greek exit from the Euro a Greek colleague summed it up pretty well when he said Greece would go into turmoil as a result. “This generation don’t know how to suffer, our parents were happy growing olives and tomatoes but my generation wouldn’t be able to handle that”.

      I think the masses have had it too good for too long and have forgotten how lucky they are tolive like kings and queens (as Ermine would put it).

  • Mr Zombie May 1, 2015, 8:27 pm

    It’s like you could be describing me and my sister there, uncanny.

    We had Steve Webb do a presentation at work a little while back. He was talking about educating kids at school about money, but said studies showed that unless it was put to use within 6 months it was lost knowledge. Never said where the study was done, mind you. Something like this maybe – http://www.wsj.com/articles/the-smart-way-to-teach-children-about-money-1422849602

    Moving to go to University sorted me out. Very little money and enough decency not to ask for hand outs. What’s funny is that it always seems to be the people that get the most help financially are the ones that never sort themselves out, rather than the other way round.

    • Under The Money Tree May 4, 2015, 9:45 am

      Mr Zombie,
      Looking back Uni was a great learning experience in ways to budget and make the most of a limited amount of £ and stretch your money over time until the next grant/loan arrived! With my loans I used to spend a third, save/invest a third and spend the remaining third on snowboarding trips 😉

  • diy investor (uk) May 1, 2015, 9:29 pm

    I believe the current government introduced personal finance into the schools curriculum recently – not before time – I am however not too clear who will teach it!

    I guess over time this should improve the dire levels of financial literacy in our country but many many people are missing out on a wide range of opportunities and/or getting into a desperate financial mess because of their ignorance of these matters.

    Also, I am not 100% sure the introduction of RDR was such a good idea – many people will now be put off doing something because they either cannot afford to pay up-front fees for a professional advise or it is not cost-effective to get advice given the modest sums most people have to invest.

    I suspect the sort of people who follow the UK personal finance blogs – yours, mine, Monevator etc., will be the savvy 1% diy minority who stand a reasonable chance of optimising the available resources to their advantage. A larger percentage will be in a position to pay for advice which will leave a very large majority of the population pi**ing into the wind.

  • Mr. FSF May 2, 2015, 4:53 am

    Have fun dumping the money pit 😉

    Good write-up though, you definitely need all your ducks in a row to make it work. Its just shocking how many people don’t. And as you noted, that includes a large group of well educated people. Like the Jason example, he is well on his way to make a very good life for himself (and his wife).

  • Martin May 3, 2015, 6:00 am

    This is a known fact, although not among socialists, communists, and similar vermin, that to make big money can be easy, but what’s hard is to keep them. Usually communists are uneducated hatred envy people (mostly called a “lumpenproletariat”) so as many times as they robbed rich people by nationalizing their property they always ended bankrupted. And this goes in all levels of a human society from the state level all the way down to each and one individual person. So as you said, it is about education and in this case a financial education. If you are a dumb idiot who spends all his money as soon as he receives a paycheck, you will never end up rich. Many times rich parents teach their kids this and do not give them their inheritance unless they prove they can manage it or deserve it. And even then, they give them only a portion of it anyway and donate the rest. It’s because you must earn it. Once you earn it, you will value it and be able to keep it.

  • Steve May 3, 2015, 6:41 pm

    Excellent post. Ditto for the brother-sister thing. My sister and I are like that. Her son has every gadget you can imagine even though she never has any money (wonder why?!) and he is well on the way to leaving school asap after spending nights playing stupid online games etc.

    — “and run my finances like a business” —
    I’d go further and say to run your finances, life, house and work as a large multinational! I take a professional approach to most things now, even the kids’ school, and consider myself the CEO of ‘Exhausted Dad PLC’ though obviously without the bonuses.


    • Under The Money Tree May 5, 2015, 11:48 am

      Sound advice though I hope you’re not paying yourself a ‘CEO’ type salary….you’ll never get to FI if you take that much out of the business each year 😉

  • The Reality Cheque May 3, 2015, 9:41 pm

    I can certainly add my name to the list of those who have experienced their own ‘light bulb’ moment.
    Following my retirement from the armed forces last year, I was looking to invest a modest sum. I didn’t know anything about investing and had never heard of the whole FI movement.
    But, after discovering The Escape Artist, MMM, Monevator and of course UTMT, the light bulb shone brightly.
    So I read and I learned. I thought and then I invested. And so far, so good.
    But, and here’s the rub, I was quite well educated about money as a child. We didn’t have very much money as a family and had to ‘waste not/want not, make do and mend’ etc., so sage advice about money was available daily. But I didn’t engage with it – these were my parents, who were seriously uncool (obviously!), so many of the sound lessons they taught simply didn’t stick. Consequently, up until recently, I was wasteful with my money. Not necessarily foolish, but certainly wasteful.
    So, whilst it’s an admirable aim to educate children about how to manage their money better, unless it engages them, it’s a waste of time and…money.
    The reason why the likes of UTMT, TEA, MMM et al, illuminated my light bulb, is that they have engaged me, with imaginative, amusing, engaging writing. That’s probably not going to work for the average fourteen year old.
    I am no education specialist, but I would imagine that classroom based lessons are probably as likely to succeed as my parent were. If we want our young people to engage with these ideas, we need to utilise the mediums they operate in. I’m no social media specialist either, but given the propensity for youngsters (my daughter included) to be glued to their handheld devices, social media, FB, Twitter, Snapchat, vlogging (and all the other media I have yet to discover), etc, are probably the only ways we can get the message across with any hope of engaging with the target audience.
    How about building a FI world in Minecraft anyone?

    • Under The Money Tree May 5, 2015, 12:54 pm

      The Reality Cheque,
      While I fully understand your point I would hazard a guess and say that the sage money advice you were exposed to as a kid enabled you to allow yourself to be engaged by the FI/Personal Finance community. While text books and theory alone won’t solve the problem it is surely the best place to start. As you rightly say, passing over the theory in an engaging way is where the challenge lies.

      Oh and thanks for the compliments – it’s always nice to hear that my ramblings here have provided some spark/use/entertainment for others 🙂

  • Dividend Life May 4, 2015, 6:17 am

    I think the Rich Get Richer and the Poor Get Poorer due to simple economics: If one person has $100 in a bank and another has $10,000 in a bank and both are treated equally at say 2% interest – the second person will always be earning progressively more money than the first and the wealth gap between them will only ever widen. Plus having money gives you more options and more disposable income for saving / investing etc.

    But at the end of the day, as you and the comments above point out, living beyond your means is a failsafe way to become poor and living within your means is a failsafe way to become rich.

    Best wishes,

  • Anastasiya Shyrina May 7, 2015, 11:43 am

    Of course, being rich and smart is the best combination for the future financial well-being. Because when you are broke and have nothing to invest (for instance, in a killer business idea) the only option is to become an employee – and we all know that in this case your financial resources will be quite limited and most likely will not lead you to significant wealth. However, I also know people who started out owning nothing and building up wealth by working tirelessly and saving up considerable amounts of regular earnings. Job + side hustles + mimimum spending = certain savings. Then these savings were put into work. As a result, people have reached financial freedom.

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