Editor’s note: This article was first published in October 2012; its examples assume a 5% return on a 12-month fixed-term deposit and an average Spanish salary of about 15,000 euros a year, both from 2012.
We’ll look at a chart on the spending habits of poor, middle-class and upper-middle-class households, explain a few points and draw a final conclusion. But first, let’s go over some obvious reasons why the rich keep getting richer with minimal effort, while the poor keep getting poorer even when they work hard not to be.
There are two old sayings:
Money attracts money: We’ve always gone by something millionaires say: the hard part is making your first million. Once you’ve done that, making a few more millions becomes relatively “not so hard”.
It’s obvious why money attracts money. Someone who has only about 1,000 euros saved and decides to put it into a risk-free product such as a fixed-term deposit, assuming they get a 5% return over 12 months, will collect just 50 euros at the end of the year, which, frankly, barely makes a difference to the household budget.
Someone who already has 500,000 euros saved, making the same fixed-term deposit at the same 5% return, would get about 25,000 euros after 12 months, which is basically 10,000 euros more than the annual salary of an ordinary worker (a “mileurista”, someone earning around a thousand euros a month). Clearly, whoever has enough capital has more resources and can invest in a range of products that are out of reach for someone with little capital. In other words, when you have money and knowledge (or, failing that, good advice), money multiplies very easily.
When it rains, it pours: When the global economy is growing and people start making money, the poor don’t know where to begin, because they have no money to invest or don’t dare to take part in the growth themselves; instead, they end up working for those who will make great fortunes from the economic cycle.
On the other hand, when the economy goes into recession, the poor are hit hardest, because they are the weakest. They are usually the first to lose their jobs, the first to feel a tax rise and the first unable to keep up with inflation. People say crises are opportunities, but of course they say that because those with money can buy much more cheaply and wait for prices to rise. Those without money experience the crisis as just that, a crisis, since they can’t take advantage of low prices without any savings.
In the end we’ll conclude that this doesn’t happen because people are financially poor, but because they have a poor mindset.
The chart we’re referring to shows the spending habits of 3 social classes in the United States (prepared by the US Department of Labor’s statistics office and published by NPR).
As the chart shows, people’s 3 biggest expenses are housing and transport, including fuel, and the percentages spent are very similar across the 3 social classes. It also shows that poor households spend twice the percentage on food that upper-middle-class households do.
Let’s clarify this point to avoid any misunderstanding: a lower percentage doesn’t mean less money, because 1,000 euros is 10% of 10,000 euros, whereas 3,000 euros is 3% of 100,000 euros. The same goes for the other spending categories.
The biggest difference is in the percentage of money set aside for saving. The upper middle class saves up to 13% more than the poor, money that goes into retirement plans or investments.
It’s a larger percentage of a much larger amount of money, so the upper middle class will keep growing its wealth, while the poor will probably end up spending that 2.6% of savings on financial emergencies. The poor get poorer and the rich get richer.
Now, many people will say: “Of course, if I earned 150,000 euros a year instead of 15,000, I’d save those amounts too.” WRONG! It has been shown time and again that when poor households earn more, the share they spend ends up growing. In other words, they tend to adjust their spending to their income: “A better car, a bigger house and more spending on leisure.”
During Spain’s property boom, the poor class seemed to disappear, because, judging by their salaries, a large share of Spaniards moved straight into the middle class. However, they made the mistake of being middle class with upper-middle-class spending. Some Spaniards pushed the share of their income spent on housing up to 80%, so today a big part of the problem is that the share spent on housing alone amounts to 120% of their salary. Yes, their mortgage payments are 20% higher than their current income, so obviously they can’t pay them.
People often say that “owning a piano doesn’t make you a pianist”, and the same is true of money: having a lot of capital coming in without the right mindset to channel it won’t make you rich.
An old millionaire used to say that the difference between the rich and the poor lies not in money but in mindset.
“Only those who know how to stay awake when the time comes achieve their dreams.”
Further reading
- The best books on financial education
- Financial education for our children: the sooner the better
- The secret of millionaires, told by millionaires
Featured image: Unknown author, Public domain, via Wikimedia Commons.
