Why the Rich get richer?

Ever wondered why the rich get richer?

Just consider this.

The poor don’t have much savings. Their income will mostly go towards expenses. There is nothing much left at the end of the month. The cycle repeats every month, going nowhere.

The middle-class (a very very large group here) have some savings at the end of the month after paying off their expenses with their income. As the cycle repeats every month, the savings accumulate. But what do they do with the savings? For most people, the savings will be mostly in the form of cash. There is no risk of losing that cash (in nominal terms), but no reward as well, earning the lowest interest rate in the market. In this case, only when the income is much higher than the expenses that the savings can grow substantially to move up the financial status. For most middle-class with average income and savings, their savings earn very little. In Singapore, the interest rate is below 1%, which is below long term inflation rate of 2-3%. So, every year, they are losing money in terms of real term.

The rich have larger savings at the end of the month. They have higher income and higher expenses (generally). What do they do with their savings? For those super rich, the money are concentrated in their businesses, especially if they are public listed companies. Every business has risk and reward. So, their money are constantly taking risk and earning the rewards when things are going well. For those not-super rich, the money could be in other asset class, such as real estate, stock market or other fixed-income instruments, such as bonds. These asset classes also possess risk and will be rewarded, on average, better than just cash in the long run. For many rich people, the return on their productive assets are usually higher than their income.

In short, the rich has their money at risk most of the time, earning the rewards based on the risk taken. The middle-class keep their money mostly in cash, so only smaller part of their money are at risk. The poor don’t have much saving to begin with.

The risk-taker are rewarded based on the risk taken. Some go bust, some hit jackpot. History shows that on average, the rich group get richer.

So, if you (including me) are not rich and want to be rich, start taking more risk in life. There is no guarantee that the risk will be rewarded handsomely. But, if you don’t take any risk, then it’s a guarantee that your savings will grow at very low rate and will only grow based on your extra savings in future.

If you are a very risk-averse person, hating risk, then it’s fine. Just focus on growing your income. There is nothing wrong with it. With high income and low expense, you can still live with good financial comfort in life.

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