Why The Rich Get Richer?

“If you are born Poor it’s not your mistake, but if you die poor it’s your mistake.”

– Bill Gates.
Jeff Bezos- Arrow of Performance
Picture Credit – Variety

Robert T. Kiyosaki is an incredible writer about personal finance. He is teaching financial literacy for 30 years to anyone looking to gain control of their financial future. Along with so many other books, ‘Rich Dad Poor Dad’ is one of his popular books. Apparently, he got rich selling books!

Image result for rich dad poor dad
The cycle of money in and out between a rich and a poor person.
Source: Rich Dad Poor Dad

The above graph is insanely simple and easy to understand.

A rich person has multiple incomes and fewer liabilities and expenses, whereas a poor person has one income and more liabilities and expenses. Being rich is a game of balancing these two. Once your income becomes greater than your expenses that is when you start building wealth and being rich financially. Obviously, the simple game plan of a wealthy life is to increase your income and reduce your expenses at the same time.

How to die rich?

For an ordinary person, one simple way to get richer is to save money and invest your saving. If you start saving a $1 a day, you are sure to be a millionaire after a million days. That is just 2,740 years! Well, you are not going to live that long. So, how do we shorten that time to our life term of let’s say 80 years?

You could achieve that by two ways.

  1. Save More
  2. Get a better return on your investment

If you doubled your saving from $1 to $2 a day, you will be a millionaire in 1,370 years. And, if you save $35 a day, you will be a millionaire in 80 years. (Assuming you just pile up your savings without investing it). However, if you save and invest at the same time, you will be a millionaire way sooner than 80 years.

Now, assuming an average rate of return of 10% per year on your investment, your $35 a day invested for 80 years will yield you an astounding $287 million. To be a millionaire, you will just need $0.125 a day or $45 per year invested for 80 years at 10 percent return on investment. Sounds easy, doesn’t it? Just 13 cents a day!

Let’s assume another optimistic situation, where you are an excellent stock investor and you earn 15% per year return on your investment. You will only need $1.9 per year (Yes, less than two dollars a year- that is not a typo) to get the batch of a millionaire.

80 years is a long time horizon. A million dollar after 80 years from now is probably what $1,000 is currently. Although $1,000 is still something. One can do a lot of stuff with $1,000 now.

If you want to die as a millionaire, you have to invest $2 per year in assets for 80 years which yields 15% return per year. This is the magic of compounding effect. That is why Albert Einstein said –

“Compound Interest is the 8th wonder of the world.”

Final Thought

Every person has Income and Expense. It is just a matter of what amount and what proportion. What Robert teaches you in ‘Rich Dad Poor Dad‘ is to save more of your income in Assets and expense it less on Liability.

He mentions that car, house, credit card debts are all liability. They periodically need money. On the other hand, assets are something that gives you money back periodically like stocks which pay dividends, rental property, commercial property, etc. Therefore, you need to reduce your expense and invest in assets which will build up your total assets and wealth.

A poor family is drowned in expenses with a single income source and a rich family is drowned in assets which produce more income. And, that income buys other assets which produce more income. This cycle goes on forever. This is exactly why rich are getting richer.

Suggested Reading

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s