One Simple Reason Why The Rich are Getting Richer and The Poor are Getting Poorer
For us millennials who grew up accustomed to commercial banking, ATM machines and swiping credit cards; we’ve never really questioned our banks before. As most of us were too young to understand (or care about) the 2008 financial crisis, we’ve all grown up with banking the very same way slightly younger generations are growing up with social media.
While the two concepts are vastly different in how they’re used and what they’re used for, they can both be looked at in the same light to give us a quick perspective. Just like the way kids today are born into a world where social media is the norm, we were born into a world where financial technology was already so developed and convenient, that banking has always been the norm for us. We’ve never cared to question the institutions behind the products that we’re using, the same way kids today won’t care to question the big tech companies that give them Instagram and Snapchat.
Unlike younger generations, we remember what it was like before smartphones and social media, so most of us are able to compare our experiences and recognise when it’s not good for us. However, with the concept of banking, it’s been engrained into the very foundations of our society through generations when it comes to managing our wealth — you probably opened up your first bank account in the same bank that your parents held accounts in.
The problem is, we’re unable to recognise the flaws in banking because they’re all too familiar to us. Not only are they just familiar, but it’s mandatory to have a bank account if you wish to work and live in any country in the world, and this fact of life often leaves individuals with a linear perspective towards managing their money.
So what does this mean for us?
Well firstly, we need to be able to recognise when it’s not a good idea to leave your money in a bank account, and we need to learn what others are doing differently.
The Problem with Banking Today
This may be banking 101 to most of you, but it’s astonishing how many adults I still encounter who don’t actually understand what banks do with their money. Put simply, banks let you deposit cash into a private, personalised account and they then lend out your money to other individuals, companies and institutions for a bigger profit.
Banks use your money to make more money, but your money never grows.
All over the globe, we’re currently seeing interest rates of close to 0%. This means that other than reasons for security and accessibility, there’s no incentives at all to keep your money in a bank account. IN FACT, while interest rates remain at 0%, all the cash that you keep locked inside your bank account is actually becoming more worthless every single year it remains in there.
That’s right. Hard working people all over the world are doing 40 hours+ every week to earn a living and save money, only for their money to become more worthless every single year.
This is because of Inflation. Every single year, the price of goods and services around the world are increasing by around 2% — yet when your hard earned money is in your bank account, it grows at 0%.
This is a very big problem that many people don’t realise they have; and while you’re exposed to income taxes and capital gains taxes on top of that, it means that unless you’re earning top-tier wage, your chances of achieving financial freedom and being able to retire are pretty slim.
So What Are The Rich Doing Differently?
Well, the bankers making profits from your deposits can be considered a part of the rich, so there’s that.
But what about other wealthy professionals? What are they doing differently from you?
Well, it’s quite likely that anyone earning a good wage in a high-level profession also has a lot of cash lying around. That’s just the facts. However, as you may have experienced yourself in life, when you start to earn more money you naturally start to spend more too. So it’s not just a case of earning a wage that’s big enough to pay for everything for the most of us.
The difference is that they’re planning for growth.
Either through their own research, or being lucky enough to have the right people around them, they’re investing their money smartly.
You may not quite see it this way, but every time you deposit cash into your bank account you’re essentially investing your money into a structure. Sure, there are other perks—it’s safer than keeping all your cash under a mattress and you can access it any time you like —but if a Wall Street broker called you up and pitched you a stock that you were guaranteed to lose money in, would you invest your money into that stock?
That’s essentially what’s happening with the money in your bank account right now; you’d actually probably be better spending your money on clothes than saving it.
The truth is, other people are safeguarding their wealth a hell of a lot better than you; and most importantly their wealth is allocated so it’s growing in a diversified manner.
So How Do You Make Your Money Grow?
Like I said, many people don’t realise they are essentially investing when they’re depositing funds into a bank account, and so a lot of people simply just don’t understand the parameters of growing their wealth. The landscape of investing is beyond enormous and your options for achieving growth are boundless; the key factor is just becoming educated about it and knowing how you can take advantage.
The only real difficulty that you’re going to have, is the becoming educated part.
There is a lot of information on the internet. Every time we ponder an idea or want to know an answer to a question, we usually ask Google. But it’s important to remember, when it comes to wealth, it’s specific to YOU. Your situation, your job, your financial position, your attitude to risk, your age, how soon you wish to/need to achieve financial freedom so you can focus on the things you really want to do in life — there’s no answer on a broad internet search that’s going to actively help you understand what you have to do to achieve the financial goals you wish to reach.
This is also why those trading apps that you keep seeing ads for on YouTube are a big “no no” for you — they provide you with limited options which you don’t understand. Most of the instruments that you can trade are very high-risk equities (stocks) and you have to manage your own portfolio without being educated about investing. These apps have been revolutionary for individuals that understand the markets and how to invest, but for the folks that don’t know anything about the markets, managing risks, and the fees and taxes involved? It’s a one way ticket to throwing your money away.
In the past, executing trades was only really available to the more qualified and experienced professionals. Today, the problem is that it’s available to pretty much anyone, and the knowledge and level of skill required to see positive returns in the high risk stock market that these trading apps provide, can only be acquired through full time dedication and years of experience.
The Key
The key is to not think of investing on such a linear scale. Investing is supposed to be diversified. Your portfolio of assets is supposed to be enriched with diversification — so if one particular investment isn’t doing so well, your assets are allocated into other structures where your money is still growing collectively and yielding positive returns.
This is how other people just like yourself are achieving financial freedom at a much earlier stage. They’re building a diverse portfolio of income producing assets, that’s specific to their profiling, and respectful of their attitude to risk, which allows their money to grow every year without paying income taxes or capital gains taxes during the term that their wealth is accruing.
Here’s a quick example of two different scenarios over the space of 20 years:
This is an example of what happens to your money if you were to save £1,000 each month for 20 years into your bank account. After 20 years of saving, you will have accrued in total £240,000. However, given that inflation is increasing by 2% each year, that £240,000 would only have a buying power of around £144,000 today, meaning your money is only worth around 60% of it’s original value when you began saving into your accounts.
Controversially, here’s an example of how your money grows with a simple savings plan that’s invested in a diversified manner. This is just a simple example of one of the many possible alternative structures that you have when it comes to investing your money. Some structures will allow your money to grow free of tax whilst you are saving/building wealth, which means your interest is compounded and grows at an even faster rate. Money that is invested in a tax-sheltered environment and grows at 7% per year, is doubled in 7 years.
The truth is, banking is massively flawed. Even if you managed to save £240,000 into a bank account, you’re only guaranteed to £85,000 of that in the UK (€100,000 if you’re living in the EU) if the bank was to become insolvent — meaning that more than half your wealth is totally at risk in a bank account.
By keeping your money in bank accounts for 20 years, you may as well wave goodbye to half your savings; by contributing into a strategical savings plan, you welcome the possibility of doubling your worth.
And this is it. It’s important to be aware that this is the reality of banking that we live in today.
This is exactly why your money isn’t growing when you’re not working, and this is how others are accumulating more wealth in their sleep. It’s all through investing in some form or another, it’s just important to be aware of what you’re actually investing your money into.
“Money is Much Like Time — Don’t Waste Either of Them”
Ultimately, it’s important to realise you are just as valuable to the banks as they are to you. Banks will easily turn you away if you apply for a loan and you’re not financially adequate, so if they’re not offering you returns that are worth your time and money, then it’s important that you treat them the same way and hold your worth.
“Time is your greatest resource, and you are your biggest asset — money is just a bonus”.
What is it that you’re currently doing in life? Does it inspire you? Are you working towards something that you want to achieve? Are you happy? Do you love your job?
The world of finance and investing will constantly push the narrative that money is the most important thing in the world — it’s not. In fact, for many people, having to earn a living is the very thing that prevents them from doing what they really want to do in life; and this is fine. We all have to do things that we don’t want to do sometimes, in order to position ourselves to pursue something that we really do want to do.
Luckily for all of us, our time, effort and money can be measured; and whatever can be measured can be managed and improved.
When we’re faced with legal troubles, whether that be through crime, property theft, family matters, personal injury or employment issues; we talk to a lawyer right away.
Without asking questions, we understand that it’s necessary to hire a lawyer in order to be able to fight our case to achieve optimum results. This is because we all understand that law is very complex and unless you studied law at university, you’re not even going to be aware of your initial options moving forward.
I’d tell anyone I speak to that it’s the same with finance.
Your finances are affected by Financial Regulations and Taxes that change every single year. They’re subject to the performance of the economy, the performance of the markets and they also have to be aligned with any new legislations that are passed.
Keeping up with finance can be hard, and like with law, you’re probably not aware of your best options for tackling any of your financial concerns and achieving your financial objectives.
This is the last thing that the wealthy are doing differently.
A large percentage of those who are achieving optimal growth with their personal finances have someone that helps them do it. Like I mentioned above, you are your biggest asset. The best investment you’ll ever make is the one you make in yourself. If you’re a qualified Engineer, Business Director, Marketing Manager or Medical Doctor, then doing that is where you’re going to earn your money and achieve value in your life. If it makes you happy also, then that’s perfect — having the time and energy to be able to focus on yourself is probably the most fundamental, necessary quality of life that you desire to have more than anything else.
Often times, it is just a lack of money standing in the way.
So, don’t try to fight your own case if you don’t know anything about the law, or you just might end up losing.
If you’ve gotten this far, thanks for reading! I hope you’ve gained some value from my writing in some way.
Feel free to connect with me on LinkedIn! If you have any concerns or objectives that you want to know your options about, I’ll be happy to have a chat with you.
Have a great week everyone!
Contact:
jacob.thompson@devere-spain.es
