Financial Literacy, the Difference between the Rich and the Poor

In the post about the God that maketh rich, we talked about the fact that a wealthy man is not one who has a lot of money. It is the one who has the ability to create wealth. This is why people who win the lottery never sustain their wealth. They go back to being broke. Welcome to Financial Literacy 101!

If you took all the money in the world and shared it equally, eventually those who were rich will become rich again. This is because the rich understand some things that poor people think are automatic. Poor people never understand the monetary system, the stock market, market values and what causes the appreciation and depreciation of products. They think there are no determinants, that it is by nature or that such systems cannot be controlled. In light of that, let’s talk about 3 things that separate the rich from the poor.

Assets & Liabilities

When rich people have money, they buy assets. When poor people get money, they buy Liabilities. Why? Rich people know what assets and Liabilities are, but poor people don’t. If a poor guy wins the lottery right now, he will buy things just to look rich. For the rich, the goal is not to look rich. The goal is to be rich. If this is the mindset, the person will look for ways to sustain wealth.

Let’s be practical. A car is a liability. Owning land is an asset. If you buy a car, you need to fuel it occasionally. You need to wash the car, service it with time and repair its broken parts. This is what makes the car a liability. Liability requires future sacrifices due to ownership of such entities. All these responsibilities would not exist if one didn’t own a car. So it’s not just about having the money to buy the car, but the ability to manage the financial responsibilities of owning one.

When a poor person gets money, he will buy Liabilities that will require regular future expenditure to maintain them. The rich will buy assets. Assets produce positive economic value. The value of Liabilities seldom appreciates upon ownership. However, rather than spending more to maintain their value, assets can rather appreciate bringing more value to their owner. You can buy a piece of land in a good location today and you can gain 10 times the monetary value of its initial market value. It’s not rocket science.

Supply & Demand

Supply and demand is the most fundamental feature of every market. When the demand is higher than the supply, prices become expensive. The product or service becomes scarce and the few who can render that service or have that product have multiple buyers who can be willing to buy at a very high cost. Owning such products comes with prestige. This is why car manufacturers can make a car model that is only owned by 10 people in the whole world.

When supply is higher than demand, prices become cheap. Anyone can buy the product. Also, the manufacturer sells at a lower price to reduce the supply of the product. This explains why buying in bulk comes with a reduction in prices. It is up to sellers to regulate the demand for their products to stabilise their market value. When supply exceeds demand, manufacturers hoard goods to spark demand among consumers. By creating scarcity, one can increase the market value of any product.

One thing rich people create and/or invest in is a product that has a high demand. They never create a product and wait to see if there will be demand for it. They understand the nature of goods and their demands. If you’re a seller, don’t bombard the market with your goods. Start with one customer. This is financial Literacy 101. Once you create a high demand for your goods, then you increase your supply. Don’t supply first.

Savings & Investments

Poor people save. Rich people invest. Sometimes, people lose the value of their saved money without realising it. The value of a currency is not stagnant, although it’s necessary that it’s stabilised. When you save $100 in January and what $100 could afford in January is less than what it could afford in December by 10%, you have lost $10 in monetary value. If savings reaped any good outcome, people would have been burying their money in the ground to retrieve it 10 years later.

However, in 10 years’ time, the monetary value of that amount could be about 300% less. Don’t get me wrong! I’m not saying it’s bad or wrong to save. All I’m saying is, the focus of the rich is to invest. The purpose of savings should be an investment. Invest in something you believe would have a higher monetary value in future than it has now. Education is an investment. Financial literacy is an investment. Physical and mental health is an investment. Don’t just save, invest. This is why real estate is the biggest investment in the world.

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Rich people usually buy assets. Poor people usually buy Liabilities. The poor usually save only, rich people save to invest. Poor people think the market is unpredictable. Wealthy people control the market. Financial Literacy, not money, is what separates the rich from the Poor.