Editor’s note: This article was first published in June 2018, but its examples use figures carried over from the 2012 version: a 5% return on a 12-month fixed-term deposit and a typical Spanish salary of about 15,000 euros a year. Deposit rates were far lower by 2018.
There’s one absolute truth: the poor tend to get poorer and the rich tend to get richer. Why this happens, as we’ll see below, is largely a matter of common sense. Let’s call it a trend, and trends have to be broken as soon as possible, at least in the case of the poor.
To break this trend, as a rule, we have to start by breaking certain habits that make us poorer and changing the way we think. It may sound like a cliché, but we can’t get different results by thinking the same way we thought along the road that led us to poverty.
See also: 10 ways the rich think differently from the poor
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 a few 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.
Why do the poor keep getting poorer and the rich keep getting richer?
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 around 1,000 euros saved and decides to put them into a risk-free product such as a fixed-term deposit, assuming a 5% return over 12 months, will collect just 50 euros at the end of the year, which, frankly, hardly makes a difference to a household budget.
Someone who already has 500,000 euros saved, making the same fixed-term deposit at the same 5% return, would get around 25,000 euros after 12 months: roughly 10,000 euros more than the annual salary of an ordinary worker (a “mileurista”, someone earning about a thousand euros a month).
Whoever has enough capital clearly has more resources and the ability to invest in various 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.
The weakest dog gets all the fleas
When the global economy is growing and the moment comes when people start making money, the poor find they don’t know where to begin: they have no money to invest, or they don’t dare jump in and become players in that growth. 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’re usually the first to lose their jobs, the first to feel a tax rise and the first unable to keep up with inflation.
They say crises are opportunities, but of course that’s said because those with money can buy much cheaper and wait for prices to rise. Those without money live the crisis as a crisis, because with no savings they can’t take advantage of the low prices.
See also: The 4 most notable differences between how the rich, the middle class and the poor think
In the end, we’ll conclude that this doesn’t happen because someone is financially poor, but because they have a poor mindset.
The spending habits that keep the poor poor
A chart on the spending habits of three social classes in the United States (prepared by the US Department of Labor’s statistics office and published by NPR) makes this clear.
As the chart shows, people’s three biggest expenses are housing and transport and fuel, where the percentages are very similar across the three social classes. It also shows that the poor spend twice as large a share of their income on food as the upper middle class.
To avoid any misunderstanding, let’s clarify this point: a smaller percentage doesn’t mean less money, since 1,000 euros is 10% of 10,000 euros, whereas 3,000 euros is just 3% of 100,000 euros.
The same goes for other spending habits
The biggest difference is in the share of money set aside for saving. The upper middle class saves up to 13% more than the poor, money they put into retirement plans or investments.
That’s a bigger percentage of a much bigger 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.
See also: How much money to save each month to be financially responsible
Now, many will say: “Of course, if instead of earning 15,000 euros a year I earned 150,000, I’d save those amounts too.” WRONG! It has been shown time and again that when the poor earn more, their spending ends up growing too.
See also: Just saving money won’t bring you financial success
In other words, they tend to adjust their spending to their income: “a better car, a bigger house and more spent on leisure.”
During the property boom in Spain, the poor seemed to disappear, because judging by their salaries a large share of Spaniards went 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 large part of the problem is that housing alone takes up 120% of their salary. Yes: their mortgage is 20% more than their current income, so obviously they can’t pay it.
They say that “owning a piano doesn’t make you a pianist”, and the same goes for 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 isn’t money, but the way they think.
Mike Todd is credited with saying that he had never been poor, though he had been without money: being broke is a temporary condition, but being poor is a state of mind.
Featured image: Maurice Seymour, Chicago, Public domain, via Wikimedia Commons.
