THE RICH GET RICHER AND THE POOR GET POORER

Author Tony DeMaio

Everybody wants to be rich! Some say they just want to be “comfortable”–but they really mean “rich”. To some, being “rich” means a mansion, luxury cars, servants, fine restaurants, etc. To others, being “rich” means having enough to eat.

Some people think I’m rich. I am. I define rich as having enough wealth to live the kind of life you wish without having to work. (If you think about it, we ALL will wish this at retirement.) There are two ways to do this: 1) make and amass so much money you can buy whatever you want; 2) want so little that a small amount of money will suffice for your life style. (Although one should really not confuse “money” with “wealth”.) Folks say I’m “lucky”, and ask, “How did you do it?” I have two answers for them:

1. One day, I was down, out, destitute, unemployed, and hungry. I had only a quarter. I went to the grocery store and bought an apple. I really wanted that apple, but I had to make it last. I polished that apple and admired it and polished it some more. Some guy came by and said, “Hey, that’s a nice looking apple. I’ll give you fifty cents for it.” I sold him that apple and went back to the store and bought TWO apples. I polished both of them for a while, and then sold THEM. I was working on 8 apples when my uncle died and left me 5 million dollars.

2. I got lucky; but you know, I found that the harder I worked, the luckier I got.

Both answers are untrue; but if you think about them, they both carry the same message.

In one sense, there is a reason that (in general) the poor are poor (the poor get poorer) and there is a reason for the rich to be rich (the rich get richer).

Consider Jack:

Jack cuts (or did cut) firewood for a living. He had a bow saw and axe. He worked every day Monday through Friday from 8 to 5 and turned out a cord of wood every two days, which he sold for $100. He made about $6.25/hr. or about $250/wk.

Jack barely made ends meet, but he kept hanging in there. He lived in a trailer and didn’t have a “well balanced diet”. One day, Jack got sick and couldn’t work for two weeks. Bills started piling up and he didn’t know quite what to do. He went to the bank for a loan. Since the bank manager knew him, he got a loan for $1,000, which he had to pay back at $100/mo. for eleven months. Jack used up $500 of the loan to pay his expenses the two weeks he was sick, and another $100 to pay off some medical bills that had accumulated. He had $400 left over. He went back to splitting firewood, and still barely made ends meet. When the end of the month came, he used $100 of the $400 that was left over from the loan to make the loan payment. The next month, he did the same thing.

It occurred to Jack that he had a major problem coming in two months when the money from the loan ran out. He didn’t know what to do. Jack thought, “I know what I will do. I’ll get another loan.” Then he thought, “No, that won’t work. The bank manager knows me.” Then he thought, “I’ll go to a different bank.” But he realized that he would just be postponing the inevitable. Then he hit upon a real strategy, he said to himself, “I’ll work an extra hour a day.” He did, and at the end of the month, he had an “extra” $125. He made the loan payment, and had $25 left over. Jack wasn’t skilled in financial matters, so he just put the money in the bank. After five months, Jack had $400 in the bank, and owed the bank $300. Jack paid off the loan.

Jack didn’t realize it, but his life had just come to a fork. He had several options. His friends urged him to take the extra hundred dollars and “have a good time”, then cut back to eight hours a day. Jack wasn’t too sure. He had just experienced a traumatic event, and wanted to have some “savings” in case of another emergency. The last emergency had cost him $100 in loan interest. That was a lot of money to Jack. He continued working 9 hours a day, and at the end of two months, Jack had $350 in the bank.

Jack went down to the bank, drew out some money, and went down and bought a chain saw. Using the chain saw instead of the bow saw, Jack turned out two cords of wood every three days. Suddenly, Jack realized that he had just been given a “raise” of about $1.25/hr to $7.50/hr. Jack’s friends congratulated him on his new wage and suggested that he could now just about work four days a week, or buy a new car, or a bigger house. Jack, however, had tasted blood. He began to work on Saturday, while maintaining his present life style. Jack began turning out four cords of wood each week, but living as though he was still turning out 2 ½ . Each week, he would deposit $150 in the bank.

Jack’s friends would ask him to go fishing or hunting or barhopping, but he was usually “too busy” sharpening his tools, or working, or fixing the chain saw. After three months, Jack had $1,800 in the bank. He went down and drew out enough to buy a power wood splitter. The combination of the chain saw and wood splitter allowed Jack to turn out a cord of wood a day while only working 8 hours a day. Jack had received another raise; he was now making $12.50/hr—TWICE his previous wage.

Jack’s friends again congratulated him on his new wage, and now exclaimed that he could work half time, and have more time for hunting and fishing. He could buy a larger house, a new car, and go bar hopping every night if he wished. Jack just nodded and said, “I’ll think about it.” Each week, Jack deposited $350 in the bank (he still worked Saturdays). At the end of the year, Jack had $20,000 in the bank.

It occurred to Jack that he was making $12.50/hr driving a truck to deliver the wood. He thought, “If I hire some kid to drive that truck and deliver the wood, I can be cutting firewood instead of delivering it. I can pay the kid $6.25/hr, and be making $12.50/hr by not tying myself up driving around.” Jack hired a high school kid part time to deliver the wood. His output went up to 1 ½ cords of wood a day, or 9 cords a week. He paid the kid $150/wk, lived on $250/wk, and banked $500/wk. He was now making about $15.50/hr. He thought that was such a good idea, he hired another kid to assist him with the wood splitter and stacking wood. His output went to 2 cords a day, or 12 cords/wk.

Jack sold the business five years later for half a million dollars. At that time, he was paying $600/wk in salary to kids, living on $250/wk, and banking $900/wk. He was making about $50/hr. and working about half time. He had banked about $200,000 over the five years. When last seen, Jack was on a cruise ship, talking about taking a year off to do some fishing and hunting, then moving somewhere and starting a firewood business. He thought he might also take some classes on investing. At his bon voyage party, his friends had told him how “lucky” he was, then talked about their next fishing trip.

There are many lessons in the above story. I won’t dwell on the obvious ones of delayed gratification, living “below your means”, “planning ahead” (Jack saw that he was going to run out of money), confronting a problem instead of postponing it; or investing instead of consuming. What I wish to consider is what it takes to “make money”. I suggest that it takes three things:

1. Time, or the hours you (or your family) work
2. Skill, or the specialized training you have
3. Equipment or “resources” (including capital, money, or employees)

One resource can somewhat compensate for the other(s). If you have sufficient money, you need not work (time) or have any skill(s), you can merely live off your investments (though one may need some skill to manage the investments). If you are a doctor and can charge $10,000 to perform an operation (skill), you need not work very long—but you WILL need “equipment”. A large family working at minimum wage can amass a fair amount of wealth/money by minimizing living costs and pooling their wages.

Jack had no skills and no equipment—he just had time. In order to “make money” he had to work longer hours. As he amassed money, he was able to secure a higher wage, since he obtained some “skill” with “equipment” (the chain saw). He could have commanded the same (weekly) wage by working less time. Instead, he chose to continue to work full time and obtain more capital—which he turned into higher (hourly) wages by buying a wood splitter. He then leveraged his time by hiring unskilled employees. Finally, he took investment classes to increase his skill in money management. Having skill at money management and enough money, he had no need to spend time to earn money.

So, if you want to “get rich” or “make money”, consider your options: How much time do you want to put in? What skills do you have or need or can acquire? What equipment do you have or need? How will you obtain the resources you need? What is the balance between all three? Two thousand dollars invested at 10% will be worth a million dollars in 65 years. Do you have that much time? Four hundred thousand dollars invested at 10% will be worth a million dollars in only ten years. Do you have that much money? How long will it take you to achieve the skills that will command a large salary? Is it worth it to “give the time away” to achieve the skills (education) or should you use the time to work? What standard of living will you maintain during this period? As you consume wealth by your standard of living, how will that affect your investment stream?

Do you want to “do what you want” (your thing) or “do what will result in the most wealth”? How can you change the balance so you can do both? CAN you do both? You have some decisions to make. Plan carefully and make them wisely and consciously or they will be made FOR you—by random events, or someone who doesn’t really care about YOUR best interests.

Alternatively, I was having breakfast in a local pub a while back. A man was playing the video poker game. He quit and took his printout to the barmaid. She said, “Hey, you did pretty well.” He replied, “Yeah, $200; that means I don’t have to go to work today.”

Yep, the “Rich get richer and the poor get poorer.”

This entry was posted on Sunday, March 7th, 2010 at 10:05 pm and is filed under Authors, Economics, Opinion, Tony Demaio. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.