“For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath.” – Matthew 13:12
Even since biblical times, before the advent of large-scale capitalism and big government, people understood that gifts were given to the rich and taxes were extracted from the poor. Wealth and power generate more of the same, and people in poverty get caught in a negative spiral.
“The rich get richer and the poor get poorer” is an aphorism created by poet Percy Bysshe Shelley. It describes the positive feedback loop and the negative feedback loop that the rich and the poor experience most of the time. It’s a natural phenomenon that people face in the real world. There are many ways to break the cycle in a free market economy through education and free enterprise.
The Five Laws of Gold from the best-selling book The Richest Man in Babylon is an excellent framework for explaining why the rich get richer, and the poor get poorer. Let’s explore the principles that cause this one at a time.
The Five Laws of Gold
The First Law of Gold: Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
Saving is the start of building wealth. The rich get richer by growing their capital as their assets increase in value. The poor get poorer as the wages they earn decrease in buying power over time due to inflation, and they can’t save any extra money to turn into investment capital due to their cost of living.
The path out of being poor is increasing pay to a level higher than expenses to create room for savings. Once savings have grown, they must be converted to investments and assets to grow wealth. Low pay and a high cost of living trap people into being poor. Even high-income earnings that spend everything they make are technically broke as they have little to no net worth and potential debt.
The Second Law of Gold: Gold labors diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
Savings can grow and compound wealth. The rich get richer through the compounded growth of their investments. They can own stocks, mutual funds, real estate, businesses, and cash-flowing assets. The rich put their money to work to make them richer through capital gains and cash flow.
The poor’s only cash flow is selling their time and labor for a paycheck. They can’t leverage their time; their jobs, careers, and ability to work can be depreciating assets. The poor get poorer when they are paid less as technology or competition decreases their value in the workforce. Having a move upwardly mobile career that grows income can help with this.
The Third Law of Gold: Gold clings to the protection of the cautious owner who invests it under the advice of men wise in its handling.
Be patient and have a long-term view. The rich have professional advisors for managing their wealth to optimize returns on capital and minimize taxes. The wealthy know how to manage money or hire the right person to do it if they focus on their business or high-income career. The rich play the long-term game of money, looking for growth over time.
The poor too often listen to the advice of their friends and family who don’t understand how money works. Never take financial advice from a broke person. The poor would be wise to watch the examples of people that are good with personal finance and investing and follow what they do for actual lessons. Model financially successful people instead of doing what broke people do.
The Fourth Law of Gold: Gold slips away from the man who invests it in businesses or purposes with which he’s unfamiliar or not approved by those skilled in its keep.
Invest in what you know about and understand. Don’t invest in schemes that seasoned investors wouldn’t recommend.“Easy come, easy go” is a formula for staying broke.
The Fifth Law of Gold: Gold flees the man who would force it to impossible earnings, follows the alluring advice of tricksters and schemers, or trusts it to his inexperience and romantic desires in investment.
Avoid get-rich-quick or very aggressive wealth-creation strategies. The poor often fall into the trap of trying to get rich quickly through gambling or falling for scammers, causing them to lose even the little money they have. There is no such thing as account managers for retail traders on social media; only registered money managers can invest other people’s money. People come late to speculative bubbles like Bitcoin, cryptocurrencies, and NFTs, and the latecomers lose money.
Most penny stock traders on social media are operating pump-and-dump scams. The best traders and investors in history made approximately 20% returns per year on average; that’s the reality; promises of more are a scam. Guaranteed returns with zero risk is always a scam. There are real trading and investing that makes people money, but neither should be attempted without first educating yourself on how to create your own system that has an edge.
“If there was any easy money lying around, no one would be forcing it into your pocket.” ― Jesse Livermore
Building wealth is a long-term process, and a complete sequence of steps must be followed to be rich.
“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” ― Jesse Livermore
The five laws of gold are a shortcut to understanding the principles of why the rich get richer and the poor get poorer. While there are other principles like education, network effects, and geographic location, these above five principles are the first things to try to fix to get money flowing in your direction.