It’s seems to be an age-old question, or maybe put more realistically, it’s usually it’s an age-old complaint that many of us (who don’t consider ourselves rich) will make. But is there any truth to the statement?
For the sake of this post, let’s generically refer to the “rich” as those with money; typically someone with more money than us. Maybe it’s someone with $100,000 in savings or maybe they have to have at least $1,000,000 or even $10,000,000 for you to call someone rich. The funny thing is that we rarely refer to ourselves as “rich”, but we usually have no problem identifying someone else as being rich. Of course you may also be thinking of the fallacy of our culture that thinks people are “rich” by the amount or types of items they spend money on (e.g. cars, homes, etc.), when in fact someone is going to be more wealthy by not over spending on those items. But that’s a separate discussion.
And what do we mean by “richer”. My suspicion is that the phrase really is referring to how quickly the rich can acquire more money faster than you or I can. Is some of it due to the hard work that a wealthy business owner might put in? Sure, that can certainly be part of it. Or do the rich have access to better investments or better investment advisers? That could be at play as well. Let’s look into a few factors and see if there are ways for all of us to get “richer”, possibly even faster than we knew we could.
The Mathematical Approach to the Question
Using my great friend, compound interest, let’s do a very short exercise on how long it will take someone to reach $1,000,000 in savings, which is an amount that most of us would say qualifies someone as being rich. If you start with $100,000 in savings and we use a 10% compounded annual rate of return (assuming no additional deposits), your balance will reach $1,000,000 after 24 years.
Then using the quick rule of thumb called the Rule of 72, while using the same interest rate of (10%), we know that it will only take 7.2 years to acquire the next million dollars. (Rule of 72 has you divide your rate of return into 72 to get the number of years it will take to double your money).
So, if you are considered rich with $1,000,000 in the bank, then yes, you will indeed be getting richer with your second million added to your savings at a much faster rate than it took to amass your first million. And as you might suspect, your 3rd, 4th, and 5th millions will come even faster, simply due to the fact that compound interest is not linear but rather geometric in its assent.
Do the Rich Get Access to Better Investments or Investment Advisers?
Do the wealthy hire better financial advisers than the rest of us can afford? Most likely the majority do regularly seek the assistance of a financial adviser, but is the adviser of a wealthy person better than one that a regular person can hire? That’s all subjective of course, but the financial advising profession does seem to be heavily skewed toward helping those that already have a fair amount of money. There are many advisers that won’t work with you until your net worth is over $1 million or perhaps over $5 million, because their payment model is based on assets under management and naturally they get paid more if they manage more assets. This of course is a big pet peeve of mine, because how is someone supposed to get advice and assistance along the way as they build wealth if advisers won’t talk to them until they are wealthy? I’ll step down from my soap box for the time being, but I’ll likely climb back up on it in other posts.
But let’s get back to the question of whether rich individuals that utilize a financial adviser have access to investments that the general population does not. I think the answer to this can be yes. It’s not a guarantee that if you have a financial adviser you will automatically be let into some special club where your returns on investment are all of a sudden 20% and higher, but there will many instances where sharp financial advisers and their firms do have access to certain offerings/investments that have greater potential for return (and potentially greater risk as well).
Can a Regular Person Have Access to Better Investments and Thus Get “Richer”?
A regular person can potentially have access to some non-traditional investments, but there are still a few hurdles to get over to be allowed to invest in them. If you can satisfy the criteria set out by the SEC to meet the definition of an accredited investor, then yes, you can have access to certain investments that the general population won’t have access to. And you don’t have to have a relationship with any investment adviser to be able to participate in these investments. I’ll go into the accredited investor requirement in more detail in another post, but the short version is that you have to have an income (individual or combined) over certain levels or a net worth above a certain level to meet the requirements to be an accredited investor. If you can prove that you are an accredited investor then there are in fact some different investment opportunities that will be available to you.
My wife and I consider ourselves to be “regular” people, and we have been fortunate enough to be able to meet the criteria to be identified as accredited investors. Granted, it takes a great deal of diligence and purposeful saving to become an accredited investor, but I do believe it is achievable by other “regular” people like us who don’t consider ourselves rich. As accredited investors, we’ve invested in some offerings over the last couple years that have brought in returns that are above what I can find from some traditional investments. Is there still risk in these types of investments? Absolutely, and some would argue that there is even more risk. I’ll go into more detail about some of our experiences in future posts, but for now, I can say that there may indeed be some ways to get “richer” that might not be available to all people.
So, to wrap up, I think that there actually is some truth to the saying that the rich get richer. By mathematics and the power of compound interest, I feel that the answer would definitely “yes”. And when we consider that they are likely some investment opportunities that higher net worth individuals may have access to, the answer is “yes” again. But does this encourage you or discourage you? I sincerely hope this can encourage you to keep saving, and keep compounding your interest and you too will be getting “richer”!