8 Reasons the Rich Get Richer…And How You Can Too!

Did you realize that the richest 1% of Americans own almost 42% of the wealth in the U.S.? If that didn’t get your attention, how about this one? The wealthiest 0.01% of Americans (just 16,000 families!) have 11.2% of all the wealth. That means the average net worth of these top families is over $500 million each!

reasons the rich get richer

For some, these numbers get their blood boiling… “Why on earth do people need so much money? With all the starving people in this world, those net worth numbers are just ridiculous! We should tax those selfish rich people more so we can eliminate poverty!”

I’m sorry, but I don’t agree with this statement at all.

If we taxed the rich heavily, two things would happen:

  1. The poor would become more dependent on handouts, which would decrease our overall productivity as a nation (don’t just give them fish, teach them to fish! …which is what I’m trying to do with this article)
  2. The rich would be less inclined to earn more because of the heavy taxes (why work harder when the reward is so slim?), so innovation would be less frequent and the overall productivity would slump

Increased taxes will only feed the already-inefficient government and make our suffering nation worse off because of it.

The poor citizens of this nation believe that they deserve money they never earned. Instead of voting to heavily tax the rich, why don’t they just do what the rich did and get rich themselves? After all, 80% of the millionaires in this world are 1st generation rich!

8 Reasons the Rich Get Richer…And How You Can Too!

It is absolutely possible to start with nothing and become a millionaire in this nation. People do it every day! To be honest, the fact that the rich are getting even richer gets me excited because that just means great wealth is possible for everyone! Instead of being a critic, why not transform your thoughts and become a hero for your family? Do what it takes to become rich, and you’ll see the reasons the rich get richer live and in person!

So how is it that the rich just keep getting richer? Based on my research, there are eight reasons.

 #1. Life Gets Cheaper

The richer you get, the cheaper things become. The main savings is with insurance. Do you realize how much money is being stripped out of your pockets each year for insurance?

For the 62% of Americans that have less than $1,000 in savings, they’re getting ripped off when it comes to insurance. Do you know why? Because if anything breaks, they wouldn’t be able to afford to get it fixed! So what do they do? They get insurance on almost everything!

The poor get poorer by purchasing loads of insurance:

  • Appliance insurance
  • Additional warranty coverage for electronics (TV, stereo, etc.)
  • Burial insurance
  • Life insurance
  • Full-coverage car insurance
  • Medical insurance
  • Home insurance

Do you know what the rich do? They stop paying for half of the insurance items above. Do you know why? Because if something happens, they have the money to simply pay for the fix!

If their washer breaks, they have enough in savings to buy a new one. If their car got totaled, they would just shake their head at their misfortune… and then buy another new-used car with cash.

And here’s the big kicker. The rich don’t need life insurance (*gasp* – no life insurance?! That’s just so irresponsible!). Think about it though. If they die and have a net worth of $10 million, do you think their spouse and children would be able to survive? Ummm, yup. No need to have a $500,000 life insurance policy then, huh?

One of the reasons the rich get richer is because they stock up their savings account and cancel a lot of their insurance policies. Chances are that they won’t total their car, so why pay $2,000 extra in insurance each year on full coverage? They’re better off increasing their deductible and paying far less money every month.

Action Items:

  1. Stop buying insurance on non-essentials like your TV. If it breaks, do without it. The rich hardly ever watch TV anyway.
  2. Pay off your consumer debts and start an emergency fund. If you save up $5,000 and your car is only worth $3,000, then there’s really no need to put full coverage on it right? Increase the deductible to $5,000 and pay far less in payments each month. Beyond car insurance, self-insuring is almost always the way to go and it will save you thousands of dollars over the long haul.

#2. They Live Below Their Means

Have you ever heard net worth millionaires talking about how they can’t make all their payments?

Nope.

Your likely response: “Of course they don’t complain about payments because they have millions of dollars. If I had millions I wouldn’t complain about my payments either.”

You missed the point. They’re millionaires because they live below their means. Not the other way around.

If you were able to invest $12,000 a year from the age of 25 to 65, you’d be worth $3.3 million. THAT’s the power of living below your means.

reasons the rich get richer

Action Items:

  1. Live frugally from the beginning. Ditch your debt completely and buy things with cash. If you don’t have the cash, you don’t need it.
  2. Don’t inflate your lifestyle with every raise.

#3. They Buy Assets, Not Liabilities

Number three on the list of reasons the rich get richer…it’s all about assets.

I run into tons of people that have invested in real estate. Some hated it, others loved it. But hardly any of them truly understood it.

Here’s the typical real estate investor. They save up $10,000, they buy a single family home with a mortgage, and they earn roughly $200 a month ($2,400 a year) by renting it out. Good for them. Now what did they do with the earnings?

  • One used the monthly income to cover boat payments.
  • Another used the money to pay for his daughter’s tuition.
  • The other guy blew it on weekend “fun”.

While some of these uses are more productive than others, are any of these people getting rich from their investment?

Not even close.

The rich take real estate investing to a whole new level. They take their $10,000, buy the house, earn the $2,400 a year in cash flow. They then use that money, pool it with earnings from their day job, and buy another rental house. Now they have $4,800 coming in each year. They do this again.

….and again

……and again and again!

Soon, they are earning tens of thousands of dollars each year with their income increasing exponentially each year!

One of the main reasons the rich get richer is because they salivate over increasing their number of assets while the rest of us climb just one rung of a 12 rung ladder and think we arrived. 

Their assets earn an income each month, which then lead to more assets, which leads to even more income. The upward cycle quite quickly becomes unreal.

(Note: I like to invest in my rental properties with cash to reduce risk. It’s slower, but still more effective than covering boat payments!)

Action Items:

  1. Write out a list of assets that earn money
  2. Set an income goal. Plan to achieve it by purchasing assets and reinvesting the profits. Do this, and you’ll quickly develop a passive income.

#4. They Buy in Bulk

reasons the rich get richer

Want to know the reason the rich keep getting richer? It’s because they have the means to buy in bulk. I’m not talking about toilet paper here. That’ll save you about $2 a month. If you want to be rich, you’ll have to think much much bigger!

What if you were a real estate tycoon and you wanted to buy 10 more investment properties for your portfolio? In which scenario would you more likely get a deal?

  1. Buying individually from 10 different owners
  2. Buying all 10 properties from an investor going into retirement

The real estate tycoon will more likely get the deal by purchasing the properties in bulk! With a deeper discount, he’ll earn even more on his cash flow each month and he’ll be onto the next investment that much quicker!

Action Items:

  1. Start thinking about how you can make money with a bulk purchase
  2. Perhaps even start a small business by doing so. Setting up an online store is simpler than ever!

#5. Yearly Tax Planning

How much money did you get back in taxes last year? Almost everyone knows the answer to this question without having to think twice. But what if I asked you,

“How much money did you pay in taxes last year?”

This is when I usually hear the crickets…

Nobody ever has a clue! But isn’t this what’s truly important? If I paid in $20,000 in taxes and got $6,000 back, am I better off than the person that paid in $10,000 and got nothing back? Of course not! I still paid in $4,000 more than they did! The key isn’t how much you get back at the end of the year, it’s all about minimizing how much you have to pay in total.

The rich know this all too well. Heck, some of them even set up their income based on the tax code! Let me give you an example:

Jim is a wealthy man. He has $10 million in liquid assets and earns $420,000 a year. Each year, Jim is taxed 39.6% on his income since he’s in the highest tax bracket. Naturally, he’s getting sick of this.

reasons the rich get richer - tax brackets

To avoid this mammoth tax bill every year, Jim decides to contribute $10,000 into a pre-tax 401k (since he earns too much to max it out), another $3,350 into a pre-tax HSA, and another $20,000 to his favorite charity. This reduces his $420,000 income down to $386,650, moving him safely into the 33% tax bracket instead.

To help earn himself more money at a lower tax rate, Jim invests his liquid assets into dividend-paying stocks, which earns him an additional $200,000 a year at a tax rate of just 15%.

The rich continually look for ways to reduce their tax bill, which inherently keeps more money in their pockets! If you want to know the reasons the rich get richer, this one’s a necessary part of it.

Action Items:

  1. Go find your tax returns from last year and check how much you paid in. Then take a look at the details and find out why.
  2. Start contributing to your 401k and max out your HSA to limit your tax liability.
  3. Look up and understand the term, “capital gains“.

reasons the rich get richer#6. Direct Investing

The wealthy don’t hunt for penny stocks and cross their fingers on doubling their investment. They also don’t blindly invest in index funds to earn a mild 7% year after year. Instead, they look for investments that they can be a part of and influence. One of the reasons the rich get richer….is because of direct investing.

By direct investing, I simply mean wealthy individuals that are actually meeting with potential business owners and listening to their ideas. If you’re a TV watcher, think Shark Tank. The rich investor grants an entrepreneur time to pitch their idea. If the investor likes what he hears, then he’ll look more carefully into the details, and then offer the entrepreneur some funding in exchange for partial ownership of the business.

Rich investors love direct investing because they can keep tabs on the business at all time (after all, they often have controlling interest) and can make it a tremendous success with their experience and their connections.

Action Items:

  1. Get completely out of debt and stock up some cash
  2. Get to know bright individuals through universities and young professionals clubs
  3. Begin investing with small figures and learn as you go

#7. Networking

reasons the rich get richerSpeaking of connections, networking is one of the huge reasons why the rich get richer.

Think about it. Let’s say you have a great invention that will automatically make your breakfast each morning, but your only friends work at the local factory and at a nearby car wash. How much are your connections going to do for you? Ummm…nothing.

Now, let’s say that you have that same idea for the automatic breakfast machine and your network of friends includes:

  • the owner of three manufacturing companies,
  • a design engineer,
  • and an executive at QVC

Suddenly, your odd invention is starting to sound like a real money maker!

The more connections you make, the better your chances are at becoming rich. This is why the wealthy are often very friendly and likable.

This is also why people that win the lottery typically blow through all their money. First of all, they have no idea how to invest it, but they also have no high-powered friendships that can help them expand their wealth – only a bunch of broke friends that have hair-brained ideas…

Action Items:

  1. Always have a smile on your face. This is step number one to meeting people.
  2. Become a member of some clubs in your areas. This could be at a private golf course or an exclusive business club. Whatever you think would help you meet people of influence.

#8. Constant Learning

According to Tom Corely, an avid researcher of the wealthy, more than 85% of self-made millionaires read an average of 2 non-fiction books a month. The reasons the rich get richer is because of what’s in their office library at home. They’re not interested in the latest Harry Potter series. They want to know how to improve themselves and what they should do to improve their wealth position.

Action Items:

  1. Read. Start learning about personal finance, self-help, business, passive income, and anything else you’re interested in.
  2. Take notes. The best way to retain your new knowledge is to write down and re-read your notes from time to time.

In Summary: Reasons the Rich Get Richer

After reading these eight reasons why the rich get richer, it’s really no surprise is it? In short, the wealthy are simply doing things that the average person isn’t willing to do.

The average person works an eight hour day, comes home to eat and watch 4 hours of TV. On the weekends they do some yard work and then play until Monday morning. Then the cycle repeats itself.

The rich? They continually think of new ways to get wealthy and then act on them, over and over again.

If you don’t start learning and implementing the eight items above, then you’ll likely never get rich… Sorry to tell you, but that’s the reality of it.

Now you know the reasons the rich get richer. Will you be one of the future rich?

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18 comments to 8 Reasons the Rich Get Richer…And How You Can Too!

  • whiskey

    Straight forward like D Ramsey. This is the kind of stuff I like.

  • Kathy

    I get so tired of the envy that seems to drive this society. Ever hear of the “Politics of Envy”? It is so powerful many political candidates use it to pander to the less fortunate to get votes and as you can see it is dividing our nation. I can personally remember when I was still working that two women were talking about the homes in the most upscale (at the time) subdivision in our city. They were saying “why does anyone need to live in a house like those?” among other things. Finally I couldn’t take it any more and asked “Why do you care? They aren’t asking you to make their mortgage payments” and explained that if one of them hadn’t taken an inheritance they got and bought a new tricked out truck, they could put that with some other money and while perhaps not buy a house in the fancy subdivision, they would have a sizeable nest egg, or perhaps buy a house nicer than the one they had. They never discussed the topic with me again. I suspect 10 years later, they aren’t any better off than before.

    • The rich can be rich and give away $1M to charity. But somehow people feel better about themselves when they only earn $30k a year and contribute nothing to society?? Doesn’t make a whole lot of sense to me…

  • The thought about insurance never even occurred to me, but it completely makes sense. I recently cancelled our home warranty insurance because I was finding no value in it and thought we’d be better off saving the money so that we could make repairs or investments ourselves. Feels good to know I’m thinking like the wealthy…I’ll get there:)
    Latoya @ Life and a Budget recently posted..Make Money From Home Using Amazon FBA

    • Good comment Latoya. Yup, covering that home warranty insurance yourself is a great first step toward becoming rich! Over the long haul, you’ll save much more money paying for your maintenance repairs yourself!

    • Tim

      When you start to crest over that hurdle and become a little more self-insured you do start to save some money year over year… (I recently did similar, but took on a little more risk in the process than probably most since I did it before being what I’d say was completely self insured. Many would probable still question my judgement on that… But if I die tomorrow… My debt can be paid and there would be about $400K left over in cash… I’d consider that covering my expenses.

      Nice job!!!

      Build up some savings for those emergencies and keep investing what would have been those insurance premiums…

  • Great info!

    I wish I could say that I do all of the above, but I do many. Need to work more on the assets vs liabilities things. I also need to focus more on the yearly tax evaluations. Got bit for 2014 with some major investment changes.

    Wish I’d known this back in my 20’s. Oh well, better late than never!

    Thanks for sharing Derek!

    • Liz and I took our first step into the asset world with our first rental (as you probably know). We absolutely love it and can’t wait to find another house to rent out once we have the cash saved up!

      Focusing on taxes can be tough. I just started late last year and am excited about our savings over the year before. We’ve got write-offs for our rental improvements, deductions for HSA and 401k contributions, and website business write-offs on our office supplies. We’ll probably pay in half the taxes this year vs. last year. 🙂

  • Renee

    Great article as usual, Derek. The only thing I’d like to point out is about full coverage on a vehicle. If a vehicle is only worth $3k, there is no sense in even paying for a $5k deductible…you should have liability only. If your vehicle is stolen, the insurance company won’t pay out anything since the deductible is more than what the car is worth…might as well not have a deductible. We recently bought a 16 year old car that is in great shape (Lexus) for $3k from a family friend. Due to the age of the vehicle, we carry liability only. In fact, I don’t think our insurance company offers comp and collision when vehicles reach a certain age.

    • Good points Renee. In Michigan we have PLPD (Public Liability and Property Damage) which covers other people and property that you might damage with your car. It has no coverage for the repair of your car. We currently have this on our Dodge Intrepid AND the Pontiac Vibe since we are both good drivers and could easily replace our cars with cash. With the low coverage, we only pay in $1,200 a year in total for both vehicles combined. It’s definitely worth having an emergency fund for!

  • Staci @Streamline365

    Wow, great job laying it out! 16,000 families own .01%. Striving to join that club now! Thanks for pointing out the insurance-like Latoya I hadn’t thought of it. Now that you mention it, I remember Suzie Orman bringing it up once, but apparently it didn’t stick. Adding to my weekend to do list…check all policies…thanks!

    • Good for you, Staci! Way to take action immediately! I have no idea what type of insurance policies you have, but I bet you’ll be surprised what you’re paying for (or not paying for) at the end of the day.

  • My favorite investment is in my friend’s business. I want to find more small businesses that are just getting off the ground and own one share. The world gets more entrepreneurs and I get passive income. It feels wonderful to see the change in him, too.
    ZJ Thorne recently posted..Preparing to Buy a Place – 1 Year Out

  • Adrian

    I wish you didn’t politicize the issue of raising taxes at the beginning of the article. Whether those 2 things you listed will happen if the rich is taxed heavily is really besides the point of what this article is trying to say. Which by the way was good.

  • […] 8 Reasons the Rich Get Richer…And How You Can Too! (17) […]

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