Why Rich People End Up Poor

Why Rich People End Up Poor

Never in history has such an enormous amount of wealth been bestowed on a country. Never in history have so many people managed to end up in debt despite such wealth. At first blush, a stranger to the US sees big houses and fancy cars, but looking closer, they see anxiety, fear, and stress.

Americans are unique in that our currency is the reserve currency of the world. Our government, via the Federal Reserve Bank, can essentially create more money by selling more debt (Bonds). This increases the amount of money banks have to lend. It is this accepted relationship with debt that has enabled generations of Americans to end up in “golden cages”.

Americans have forgotten, or never learned, the basic principles of debt. When you owe someone money and all you have in exchange for that money is your time and “stuff” (cars, furniture, houses, boats, computers, etc.), then you are essentially a servant to that debt. Lenders do not want the “stuff” you purchased with borrowed money, so you are left with exchanging time for paying off the debt. In other words, if you have to work to pay off your debt, you are working for that debt.

The solution is simple: do not borrow money or, if you do, make sure someone or something else is paying for that debt. If you want a new car and cannot pay for it in cash, your option would be to buy investments that generate enough cash to pay the debt or to start a business where others work for you to generate profit that pays the debt. Then your time will remain your own as the asset or your employees are paying the debt. Assets that pay cash are easy to find and include dividend paying stocks and REITs to name a couple.

How do the rich screw this up when the answer is so simple? Most people start borrowing in college. They spend money on liabilities such as tuition, homes, and cars. They more they make, the more they borrow and spend. They end up working for the banks and lenders as the banks and lenders. This is called the losing loop and almost always ends painfully.

The losing loop is working to pay your debts while continuing to incur more debt to support your spending. Eventually, you will not be able to work (age, illness, laid off) to pay off the debt triggering your financial collapse. This plays out every day in the wealthiest country on the earth. Though perhaps not always easy, the solution is simple and virtually ignored in our education system. Cash flow is the key that unlocks our golden cages.

First featured on Forbes.com


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