And The Rich Get Richer

There’s no doubt we live in an economy that favors the rich.  And I’m not talking about tax laws, corporate lobbyists, unlawful LIBOR fix scandals, or the arguments made by the the 99%.  I won’t deny that those things exist, nor will I deny that there are some greedy people out there who will bend or break the law to get richer – but that’s not what I’m talking about in this post.  I’m simply talking about a capitalist economy that’s driven off debt and credit.  It’s an unfortunate byproduct of capitalism – The people that don’t have money need to borrow it and pay interest, thus digging a bigger debt.  Meanwhile, the people with all the money lend it out with interest, thus creating a bigger stockpile.  If you view it that way, capitalism seems pretty evil.  While capitalism does enable some to rise from nothing to greatness (the American Dream), credit and debt still are part of this infrastructure for the rich to get richer, the poor to get poorer, and the working class to get more work (to cover consumerism, a key ingredient to successful capitalism from a macro-economic viewpoint).  

So if debt and credit are key to the capitalistic economy, then there must be debtors and creditors.  Being a creditor simply means giving away some of your money today, for more money in the future.  People borrow money for many reasons, but they all have one thing in common – when they borrow my money, they are now working for me.   

A Simplified Creditor/Debtor Example

Let’s say Joe and Sally each have $10,000.  Both have no mortgage debt, and each have a job where they are able to save $200/month after all expenses are paid.  Joe has a bike, and he rides it to work.  Sally, however, wants to buy a new car for $18,000 so that she can ride in with a little luxury.  So Sally asks Joe to borrow $8000 to cover the portion of the car she can’t afford, and they agree  on a 10% interest rate to be paid out over a 5-year term.  Both are happy with the deal.  Sally gets her shiny new car, and Joe figures he’ll get a little extra income while doing no additional work.

At the end of the first month, Sally owes Joe $170 ($67 in interest and $103 in principle).  Luckily, she has $200 left over from her paycheck after paying all her other bills, so she walks away with $30 in savings for the month plus she still has a pretty new 1-month old car.  Joe, on the other hand, has his $2000 left over after lending money to Sally, plus the $200 he has leftover from his paycheck plus the $170 he just got from Sally.  So Joe’s got $2,370 after the first month.

A year goes by, and Sally keeps making her payments to Joe right on time.  And at the end of the year, Sally has $360 in the bank compared to Joe’s $6439.  Sally’s car is still pretty new, and she certainly hopes it stays that way since she couldn’t afford any maintenance on the car. Joe’s feeling pretty good though, his bank account is increasing by $370 every month and he’s thinking about looking for new ways to invest it.

2 more years go by, and there’s been layoffs at work.  Sally’s getting worried she might be impacted since she only has $1,080 in the bank, and her cars not  as new as it used to be.  If layoffs come or if her car fails her, she’s got no buffer.  Joe, on the other hand, has $15,319 in the bank, more than enough to cover a few months if he were to be laid off.  

Finally, after 2 more years, it’s time for the final payment on the car.  Sally write’s that last check for $170 and it couldn’t have come too soon.  After 5 years, all Sally has is $1800 in the bank, a 5-year old car that needs some new tires, and a lot of stress about not having an emergency fund.  So she hands Joe the check and says thank you.  Joe interrupts her to say “No, thank you Sally.  You’ve made me quite rich.”  Sally doesn’t understand, she thought the loan was a very generous favor from her friend.  After all, she’s driven a car for the past 5 years, largely because of the money her friend was willing to lend to her.  “After all, you’ve paid me $2200 in interest over the past 5 years and you never missed a payment. ”  

Now imagine if Joe has $80,000 and 10 friends named Sally.  Or imagine if Joe reinvested his money as it was coming in (compounding interest).

The moral of the story: you can be Sally and have your $1800 bank account, 5-year old car, and a lot of stress….  Or you can be Joe with his $24,200 bank account, his bike, and the freedom that $24,000 gives him.  I choose to be Joe, and let Sally work for me.

But this article isn’t about the virtues about riding a bike rather than a car.  It’s about the advantages of being a creditor rather than a debtor.  Riding a bike isn’t the only way to save money, and lending to friends isn’t the only way to loan money.  Here are a few examples of ways to make your money work for you…

Corporate Stocks

There’s no shortage of companies that will take my money in the form of corporate stocks.  In fact, they aren’t just borrowing my money, they are allowing me to buy partial ownership of the company.  From that point forward, everyone in that company is working for me.  Each morning my employees get up, drink their coffee, and sit in traffic just so they can work for me.  They sit at their cubicles and in their labs and factories, they design things, build things, and provide their services – all for me, while I’m sitting at home enjoying life.  And all I had to do was buy them with my money.

On top of that, I’m in total control.  While they’re toiling away with their work, they’re also forced to provide financial statements to prove that they are profitable and that they’ll be able to continue to pay me my dividends that they’ve been paying me for years.  As soon as those reports turn south, I can simply sell out my portion of ownership to someone else, and look to buy ownership of a new company.  Maybe even a competitor – since I don’t have to be loyal to them.

P2P Lending

For years now I’ve viewed the bank with partial disdain and partial envy.  The banking system is set up such that banks can “hold” other people’s money while paying them a fraction of 1% in interest, then turning around and lending out 10x that amount to other people for several percentage points higher.  So if I give the bank $100, they can lend out $1,000 to someone else while charging 4% interest.  If only we all could do that. Unfortunately, we can’t.

But there is a way to “be the bank,” and that’s through P2P Lending. People want money now, and they are willing to pay a high premium for it.  So as long as they promise to pay it back, I will lend it to them.  And every single person I lend to is now working for me.  While I’m sitting here writing this post, there are hundreds of people out there working hard to pay back their micro-loan to me plus a high interest rate.    

Hard Money Lending

Hard money lending for house rehabs is one of the more rewarding ways I’ve found to make my money work for me. Not just because it’s one of the most profitable (although it is), and not just because it’s a reasonably safe loan with hard collateral backing it up (the house), but also because it’s restoring an old structure and creating a new home for someone.  

For hard money lending, I’m buying a team of people to work for me.  And much like with Joe and Sally, the team views it as a success to get my money, where as I view it as a steal to get all these people working for me and paying me to do the work.  I get a real estate investor to find homes on the cheap, hire construction companies, roofers, painters, carpenters and plumbers to restore the house.  Then that REI hires a real estate agent and a lawyer to find a buyer and close on  the house, all while I’m out riding my mountain bike and collecting 10% interest or more.  If the deal goes well, I can rehire that team of people again.  If not, I can move on to a new team.


Of course, there are many other ways to lend money and get people doing working hard for you.  But the point is this – you can be the debtor, or you can be the creditor.  Capitalism highly favors the creditor, and the wealth gap is growing every day.  As much as I despise that gap, I prefer to be on the better side of it.  

24 Responses to And The Rich Get Richer

  1. Michael Keel says:

    Great Post!
    I would love to hear more about the Hard Money Lending…
    How do you do that?


  2. I prefer to be a creditor as well. I don’t think debt and credit are bad things. If you borrow it for the right reason, then it’s a great way to get the ball rolling. Borrowing for education and business investment are two things that I agree with. We would be a lot worse off if we couldn’t borrow for those.

  3. Poor Student says:

    I agree with Michael Kell in that I want to hear more about hard money lending. Is your example just an example or is that what all hard money lending is, paying people to fix and flip a house then collecting the difference? I have never heard about it and it sounds like a cool idea.

  4. Matt says:

    If you despise the wealth gap, why not loan your money at no interest?

    • Actually, I do. I’ve been a supporter and lender at for about 4 or 5 years now. Kiva does micro loans just like Lending Club, but it’s loaned with 0% interest to entrepreneurs in (mostly) developing countries.

  5. Oelsen says:

    1. In the long run – and when money isn’t created where infrastructure is built – this system will grindingly halt.
    2. There are many, many can’t earn enough to save. They live from hand to mouth and can’t diversify their income. Path dependency, social forces and sheer enoughness induce this inertia.
    3. I think your way of live should be the stepping stone to a more localized way of doing things and more capital in tangible things invested. A deliberate way of investing surplus in capital or energy producing assets is what the new educated middle class should go.

    • Regarding point #3, I can’t agree more. Once I quit and starting earning more through my investments than I need, I am hoping to direct substantial parts of the excess to things that further my independence from the debt/credit work/money system.

      I would like to get enough solar power set up to cover 100% of my energy needs. I’d like to grow enough food to cover a major portion of my food needs. I’d like to learn the skills to fix/maintain my wife’s car. All these things to separate needs from money.

      My ideal scenario is to become 90% independent from the money system, depending mostly on self-sufficiency and localized trade, all while not having to go “off grid” in the traditional sense. Sort of the native american lifestyle, but living in suburbia…

      • John says:

        One utility that is very hard to get off the Grid is the Internet. Paying $52.95/mth for it when it was $30/mth and it will increase as the Cable monopolies convert to Internet monopolies.

        Yes one could use the Internet at one’s Public library. But that commute will wastes 30 min to an hour by bike per day.

    • Van says:

      Do you have any articles describing why point 1 is true? Some of the most prosperous times in history have marked deflation. So long as the price of inputs decreases at the same rate or faster than the price of outputs the nominal value is irrelavant. I think, anyway.

      • I assumed his point #1 was referring to the globalized economy where the value of the dollar can fluctuate compared to inputs and outputs. So If I run a business in the US and need to purchase something from China, but what used to cost me a dollar now costs two, then it becomes harder to make a profit.

        However, this goes both ways. If I invest in global companies, I can also increase profits in the countries with stronger economies. So for that reason, I’m less worried about specific currency deflation.

  6. Mr. Thrifty says:

    A great example. Sally is young, she could have borrowed money from Joe and invested it. She could have even bought investments on margin. Which is to say that in a society that favors capital, young people should be using it for things that have a chance to build that capital instead of depreciating in your yard.

  7. […] This is comparable to the capitalist economy which involve debit and credit so there can be debtors and creditors. In this kind of system, being the creditor is always the best because if you have the money, you can use this money to earn more in the future. Creditors lend money and debtors borrow money for many reasons. Debtors will have to pay the borrowed money with the principal amount along with the interest, making the creditors wealthier each time. Hence, once debtors borrow money they are actually working for the creditors making them richer and richer. […]

  8. Evan says:

    Kind of romanticizes the perfect borrower, no?

    • I don’t think so. It turned out well, but Sally was far from being the perfect borrow since she was dependent on her continued employment to make the payments. Sure, it worked out well for the creditor, but it wasn’t without risk.

      The perfect borrow would be someone with diversified income and plenty of cash reserves in case the income was reduced.

  9. BNL, just dropping by to let you know that I quit my job!
    Hope you’re doing well in your journey.

  10. TrekMan says:

    Today I biked to work for the 2nd time. I’m looking forward to using some of the money I will save for fun stuff and some for saving.

  11. Olivia Moore says:

    I have always been an avid reader of constructive piece of writing. Keeping the present economic scenario in mind, readers need to follow more of such sort of articles in the coming days to enrich their knowledge.

  12. Sean says:

    I was a little disappointed by this piece. Not that it was terrible, but I thought it was going to be awesome. Awesome, because I like your style and it felt so promising starting with the line “…capitalism seems pretty evil.” I know you don’t believe that or at least would not consider that the most accurate generalization. So I figured such strong language would be followed by a solid argument why capitalism is not evil.

    Instead I found the parable. Meh. I am not sure if you are purposefully emulating personal finance/self help/motivational types with your “$200/month” language or if they’ve just rubbed off on you (I don’t know what you read). (BTW big fan here, and I hope you don’t mind my summarizing your own writing. I am just hoping to show that I’ve seriously considered what you wrote, as opposed to using this box to spout off nonsense). You seem like a deliberate guy, plus you took the time to write this, and you deliberately commented on the purpose of the parable, creditor > debtor. Got it. Is that really the message you wanted to spend your time to send? It TOTALLY could have been (plus the summary+comments of your investment strategy). Motivating people is great.

    But what about being a debtor is great? Why is the system not evil? Where’s the follow through to that jab? If you don’t have particularly strong opinions on that matter, fine you’re just like me, a curious fellow. If you do have opinions, I’d like to hear them. If you don’t fell you have well thought out opinions or the time to write, references would be cool too.

    Might I propose a “Rich get richer” sequel with a debtor that doesn’t arguably waste her money and instead buys something that makes even more money than her payments. Throw on whatever tweaks you want for whatever point you actually want to make.

    You might also address you jab at consumerism. I don’t feel consumerism is necessary for successful capitalism, but you seem like a reasonable guy, maybe its semantics.

    I also have a question about the topic here. What are the “many other ways” alluded to above? If you don’t mind me categorizing similar financial products in with corporate stocks, then these seem like pretty much it for an armchair investor. I am not interested in managing my money as a full time job, but I don’t really like the idea of a money manager (Although you’d do). However I find the risk’s available to me too low. Really the returns are too low, but I am willing to accept way more risk. So what are the riskiest “other ways”? I know you are interested in diversification, and it seems you do not write until you have thoroughly checked out something. So what’s on your list that you haven’t tried yet? And what have you dismissed?

  13. About twenty-three years ago, I bought a condo in Silicon Valley as a single woman. I had to cash in a 401(k) to do it. (Yeah, I know, really bad idea.) I knew there would be penalties but I didn’t plan on getting socked with a $6600 tax bill.

    I was moaning to a friend about how I couldn’t afford to pay this and he generously suggested I borrow the money from him. Like Sally in your example, I never missed a payment; in fact I accelerated repayment.

    Even though I established myself as a debtor to his creditor, he asked me to marry him anyway. :-)

    See, there’s a happier ending to the saga of Joe and Sally.

  14. I’ve found to make my money work for me. I get a real estate investor to find homes on the cheap, hire construction companies, roofers, painters, carpenters and plumbers to restore the house.I agree with your article.Thanks for sharing this one day story of yours with us.

  15. […] that financial writers hammer the concept of compound interest (like here or here or here or here..  You get the idea).  If anything, the American public as a whole is woefully uneducated about […]

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  17. […] markets meant we lacked headwinds to help us get richer. Combined with a large (by our standards) charitable contribution timed to improve our tax […]

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