Why are poor people poor? This is because poor do not know how to get rich. Poor think that making more money can make one rich. But this is not correct. One must attain financial independence first. Only after achievement of financial independence one can start getting richer. The difficult part is achievement of financial independence. Dependency on monthly pay check keeps one poor.
Getting rich is not easy. Its specially difficult for middle class people. When income is limited and expense is sporadic, getting rich becomes tough. More importantly, what is done in day-to-day life is what’s keeps one poor. Poor also works very hard, but continue to stay poor. The main reason is ‘pay check dependency’. This is the root cause. Its because of ones bad habit that he/she continues to live pay check-to-pay check. This way poor people will only continue to be poor. Dependency on pay check must be reduced. This is step one. One must have sufficiently big income generating asset that can maintain one standard of living even when there is no pay check.
(3) Why are Poor People Poor – Because they carry High Debt
Its very interesting to see ones transformation from from being poor to financially independent. There could be several road blocks ahead. But pleasure & excitement of this transformation keeps one going. Imagine yourself trapped in a dark cave for years. Suddenly you see a very thin ray of light and you travel in its direction. You travel with a hope to see clear sky. Financial independence is our clear sky. Slowly-growing-income-from-asset is our ray of light. The more assets one accumulate the closer will be financial independence. And once we reach financial independence, nothing should stop us from “Getting Richer”.
From where we must start our journey to financial independence? The starting point shall be to recognize factors that justifies why are poor people poor. Eliminating these factors should be the immediate priority.
(1) Why are Poor People Poor – Because they Save Less
Yes this is a fact, rich spend less and poor spend more. We actually believe the opposite. Rich actually spends less. Poor people spend beyond their means. Proportionally, rich spend less than poor. If poor earns $20,000, they spend $19,500. While if rich earns $100,000, they spend only $65,000. Percentage savings for poor is only 3%. While rich saves 35%. Irrespective of the fact that rich spends 3.33 times ($65,000 Vs $19,500) of poor, they still save more than poor (35% vs 3%). Higher savings, year after year can make poor get rich. Lower savings is the reason why poor people continue to stay poor. Low saving is common among poor and middle class people. First we overspend, and then make up for these over spending’s by dipping into our savings. We may be saving more than 3%, but we ultimately spend our savings on useless things. This makes our effort to save money go in vain. If savings are not sufficient we use credit cards. How many times it has happened that you bought the latest smart phone from savings or credit card? It happens every two year perhaps. This habit of eroding our savings justifies why are poor people poor. Careful analysis of one’s financial needs is essential. Ones we know our financial needs, we have to save and spend accordingly. Saving and spending planning is called budgeting. Sticking to our budget no matter what comes in life is the key to become rich.
(2) Whey are Poor People Poor – Because they do not Plan for Emergency
Rich people handle emergencies better than poor. No one can forecast emergency, but we can be prepared. At least the money-part can be planned. The thumb rule says, one shall have a emergency fund big enough to manage 3 months expenses. How many of us maintain an emergency fund this big? Rich does it very judiciously. The richer a person is bigger is their emergency fund. I personally have met a person who has more than 8 month worth of emergency fund. If he loose his job, he can still maintain his standard of living without touching his assets. Poor people really fair bad in handling emergencies. Many people maintaining term plan, medical insurance, auto insurance, property insurance etc. In addition to this one must have minimum 3 month worth of emergency fund. This emergency fund is like a liquid-reserves in bank. Poor do not plan like this. Ultimately their savings get eaten up when emergency strikes. Its regular erosion of savings that keeps poor people poor.
(3) Why are Poor People Poor – Because they carry High Debt
Capability of rich people to pay debt is high. But they prefer not to avail debt. This is what poor people must learn from rich. Debt is never good for ones financial independence. On an average, a poor person pays 35-40% of their income to payback debt. This percentage for rich is much lower. Poor overspend by taking loan. Things that they cannot afford, they can buy using debt. This is why these days everything in market can be purchased with EMI. Mobile phones, Television, High value credit card purchases, furniture’s etc everything is available on EMI. But debt is not good, who buys these products on EMI? Rich people do not buy it with debt. But poor people, who cannot afford then buys it with EMI. It has become a habit. When need comes poor people opt for bank-loan. But this is a wrong way to manage requirements. Better option is to pan & save for requirements from before. If we know today that after 15 years, our child will need funds for higher education, start saving from today. People often take education loan to pay for education fees. Pre planning can save us huge amount of money. Debts makes purchasing easy but they are costly. Careful analysis of one’s financial needs is the key. The more we plan less dependent we are on debt.
(4) Why are Poor People Poor – Because they do not follow Financial Independence
Rich people complicatedly makes themselves more financially independent each month. But on other hand poor people does Know the concept. This is one factor that makes a huge difference between rich and poor. Financial independence is the first milestone in becoming rich. Achievement of financial independence takes time. Its better to realize the importance of financial independence as early as possible in life. A rich person of today, started his journey towards financial independence years back. How rich handle income & expense is very interesting. I have represented in a graphical way to elaborate the difference between rich and poor’s way of handle income & expense.
Once the person becomes financially independent, the journey of becoming rich starts. The best part is, a financially independent person gets richer each day. Not only he is able to afford more expenses (luxuries of life) but his personal asset also appreciates. How this happens is represented in the flow chart:
(5) Why are Poor People Poor – Poor People are Bad Investors
Rich people are matured investors and Poor are Panic Investors. This makes a lot of difference. Lets see few examples what makes poor people bad investors. (a) When rich buy stocks, poor people are selling them. When poor people buy stocks, rich are selling them. (b) Rich buy those stocks which show strong fundamentals. While poor people buy those stocks which everyone else is buying. (c) Rich people buy stocks which are undervalued. Poor people does not know how to value stocks. (d) Rich people invests in real estate property during project launch. Poor people buy second or third resale property which are already expensive. (e) Rich people buy multiple property for rental income. Poor people buy just one property for self occupation. (f) When poor people are taking possession of property, rich people are selling them. (g) Rich regularly buy gold as a inflation hedge. Poor people buy gold only during festival seasons. (h) Rich never keeps free cash. Poor people keeps all saving as cash. (i) Rich buy investments not to use that money for next decade. Poor buys investments and breaks it the next month. The idea is to observe rich and become a matured investor like them.
