On Paying Yourself First: The Gap Between Rich and Poor
Politicians on a certain side of the aisle like to draw attention to the ‘injustice’ in the increasing gap in wealth between the rich and the poor. The wealthy, despite paying a disproportionately high percentage of their income to the government to fund welfare programs for the poor, manage to accumulate more money every year. The poor, whilst being the primary beneficiaries of these transfer payments, see little increase.
As a perverse campaign tactic, politicians stir up resentment against the wealthy by claiming this as evidence that the system is rigged against the poor.
The truth is, people continue to do what they’ve always done. The wealthy continue to make the same wise choices that made them wealthy, and the poor continue to make the same unwise choices that keep them poor. (For those that have trouble with generalizations, try to understand that I am talking about the aggregate, a specific person.) Bad habits are to break and good habits are hard to make. It’s human nature.
These habits reflect a fundamental difference in how the wealthy and the poor think about money. The poor never have money left over to invest after they pay their bills. They spend first and invest what’s left. In contrast, the wealthy (at least in their early accumulation period) are short on money left to pay expenses after they invest. They invest (”pay themselves”) first and spend what’s left. They treat investing like a mandatory bill to pay.
No matter your income, you must set aside money for investment first. The excuse that you don’t have enough money to invest doesn’t fly; there’s always someone getting by with less money than you are.
The sad statistic that one-third of lottery winners go bankrupt a few years collecting their winnings demonstrates this difference in priorities. These people were poor before they won the lottery and they quickly became poor again afterwards. No amount of money will make you wealthy if you spend first and invest what’s left. These folks weren’t poor because the system is rigged against them. No, they were poor because of foolish choices.
If you’d like to learn more about the wealth mentality of “paying yourself first,” I recommend that you pick up a copy of George Clason’s 1976 classic, Richest Man in Babylon.
