Rich People

If you can’t beat them join them

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Rich people get richer. Normal people fall back. The system is rigged. It’s not fair. Someone should do something about it.

 

The Guardian ran a fantastic incendiary article last week. According to the author, if present trends continue the top 1% will hold 64% of the world’s wealth by 2030. Even if there is another financial crash they will probably continue accumulating assets while the wage slaves live paycheck to paycheck.

I get it, I really do. The wealthy have successfully lobbied to lower taxes for decades and income from investments and inheritances enjoys preferential tax treatment compared to income from employment in many countries. The value of labour is decreasing as automation spreads, and capital becomes more valuable.

Thomas Picketty brought this conversation into the public eye with his doorstopping Capital in the Twenty-First Century (which everyone, including me, references but hasn’t read -The Economist has a good summary here) and no doubt some kind of political/social response is due.

However, for the individual, this kind of thinking is counterproductive. Of course the rich are getting richer, they are investing wealth, and compound interest can allow growth in investments to dwarf that of income growth.

Harry Browne’s libertarian take on this is much more useful than outrage in my opinion. He advocates doing what you can for yourself and ignoring wider society. After all, the only thing you have control over is yourself and your actions. I really recommend his book How I Found Freedom in an Unfree World. He also invented the permanent portfolio as well as running for the US presidency, so he might know a thing or two about investments and politics.

I have seen the power of capital myself even with the relatively small amount I have invested so far. My wife and I only started investing in the last decade, and already we have seen years when our investments grew more than our annual income. I imagine this trend will only accelerate as we accumulate more and more capital.

Apparently most millionaires are self-made (you can read a lot more about this in excellent book The Millionaire Next Door) so to me the most logical response to news stories like the above is not to get angry about the rich, but to join them. 

How to do that? Well, it’s very simple. Not easy, by any means, but simple. Actually following through on this is hard, but it is not complicated.

All you need to do is earn as much as possible, spend as little as you can without being unhappy, and invest the difference. Over time you too will benefit from the power of capital, and maybe even join the 1%.

The nice thing about this is that it isn’t all or nothing. Even saving a little means that you are more protected from financial setbacks. Investing a little means you can grow your income/wealth, which makes it easier to save more going forward. Repeat until financially secure.

How about you? Are you on the road to riches? Do you disagree with my pragmatic approach? Are the odds hopelessly stacked against the little guy?
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9 Responses

  1. Wholeheartedly agreed!
    As much as we would like to lament that fair is unfair, a fact is still a fact. And what better way to improve one’s situation by DOING something about it, than to expect something to happen.
    Might seems as though that people like us are constantly preaching to the choir, but the principles behind personal finance are that simple. So simple that those listening usually drop their jaws in disbelief 😉

  2. There is some interesting research indicating that people are less concerned about economic inequality per se, than they are with economic unfairness (link to abstract here: https://www.nature.com/articles/s41562-017-0082).
    We don’t mind the rich being rich or getting richer, so long as we all have a fair shot at getting there ourselves. This is what makes the poverty trap and the squeezing of middle class incomes so pernicious.

  3. Yes, most people have a visceral dislike of anything that seems ‘unfair’. For example, they’ve done studies where basically, Person A says he found a dollar, and he’s going to split it with Person B. If Person B agrees to Person A’s split, they split as per Person A’s suggestion. If Person B disagrees, neither Person gets anything.
    Here’s the thing: Person B is better off no matter how Person A proposes the split. 60-40, 70-30, 90-10 etc – even 99-1, Person B is arguably better off with 30, or 10, or 1, over nothing.
    And yet, the more unequal split Person A proposes, the more likely Person B is to say no. In other words, most people would rather both get nothing if the perceived split is ‘unfair’.
    I slightly disagree with the ‘poverty trap’ tho. I grew up poor. Like, dirt poor. Like, we couldn’t buy dirt. Unless it was dirt on sale or something. But the major ‘poverty trap’ we faced growing up was parents that didn’t have a clue about personal finance and were happy to spend money they didn’t have because ‘credit card’.

    1. “Yes, most people have a visceral dislike of anything that seems ‘unfair’.”
      Yep that is for sure, animals also have this trait, see below for a study that was done with Monkeys in regards to fairness:

    1. The ‘successful stagnation’ thing makes a lot of sense. It’s important to keep growing and developing in all areas of life, eh?

    2. I heard of a rich father-in-law in Japan who gave his grandchild 10 yen otoshidama last year! Straight up. No exaggeration. Let’s hope he makes up for such meanness with free financial advice as to how the boy can invest that single coin.
      As for the grand scheme of things, I think Lester Thurow American economist hits the nail on the head:
      “How does one put together a democracy based on the concept of equality while running an economy with ever greater degrees of economic inequality?”
      The policies and laws are not in place and being reinforced adequately enough to stop the steady flow of people landing in ‘hard times’.

  5. I think your approach is very naive. It seems that it’s only a question of will if I read you quickly.
    But to save money and have opportunity you need also to be in a position where it can happen.
    What if you don’t birth in a rich country but instead in like North Korea or black African countries? What would be their chance to succeed following these recommendations compare to somenone in US/Japan? 0.000001%? They would need 10 lifes or more just to get even just closer to it.
    In these situations you might still be rich thanks to your family, but probably almost never from you own personal efforts…
    And guess what it represent most of the human world population.

    1. The Ovarian Lottery, as Warren Buffett refers to it. Indeed.
      But the fact remains that individuals have agency, and given that agency it is better to be informed and proactive instead of gloomy and passive.