Why The Rich Get Richer, the Poor Get Poorer & the Middle-Class Stay Stuck in Recessions

Depending on your economic status, you are either having the time of your life, struggling to survive, or frustrated by stagnation and an inability to do anything. Right now, the rich are like children in a free candy store. The poor are fighting to keep their children fed and fear becoming homeless. The middle-class are trying to hold on to their jobs, the money they saved, and to move toward wealth and away from the poor house. So, why do 3 different sets of people look at the same economy in such different ways?

The Rich Get Richer

Those with wealth look at money as being in abundance. They understand that money comes to them by providing products or services that people want to buy. So, they serve as many people as possible that are willing to provide them the dollars they desire to maintain their economic status. The rich don’t spend…they invest. Spending depletes wealth while investing increases it. The wealthy look for opportunities to receive residual income – money that comes from a product, service or investment that is setup just once and pays them over and over again on a residual basis. The wealthy make money while they are sleeping. Contrary to popular belief, the wealthy also look for every deal possible. They never pay full price. To the wealthy, everything is negotiable.

So, what do the wealthy do during a recession? They invest in the numerous low cost businesses and franchises that are now available. They hire the best and the brightest talent at a discount because jobs are scarce. They buy investment properties while the price is at rock bottom. They continually focus on increasing their ability to take advantage of today’s low prices so that when the prosperity cycle comes after the recession, they can collect as much money as possible from everyone else. They buy investments while they are at their lowest point and sell them before they peak at their highest point to lock in the gains. The wealthy have multiple sources of income.

The wealthy also buy, but they buy differently. In this recession, there are incredible deals on automobiles as an example. Therefore, they do one of two things. They make the purchase at a severe discount, or invest in a business, wait to have enough profit from that business to buy the car, and then year after year continue to profit from that business. Many purchases by the rich are also well thought out as to it’s resale value over time. The wealthy use credit when their rate of return is higher than the rate of interest they are being charged. This means that the wealthy have the ability to profit from borrowed money.

To the rich, a recession is full of opportunity and even more wealth in the future.

The Poor Get Poorer

Those that are poor look at money as always being in short supply. They view money as being only so much, and they can never quite get enough. Money to the poor is day-to-day survival. The only way money can be earned is hour-by-hour…money exchanged for hard work within a given time period. They trade hours for dollars. The problem is that there is only so much time a person can physically work. Therefore, there is a limit on how much money a poor person can earn with this strategy.

The poor don’t invest…they spend. Even when there is extra money, it must be spent before something comes up that takes it away. To the poor person, money never grows and always decreases. There is also no such thing as an opportunity in the future. What is more valuable is money in hand today. So the concept of investment, delayed gratification and profit are ideals that only seem to work for very few people.

When shopping, the poor are often confined to their neighborhoods due to lack of transportation. Surprisingly, food can sometimes cost more in poorer neighborhoods than in wealthy and middle-class neighborhoods! Some poor people are willing to spend their money on making themselves appear as if they have more money than they actually do. Therefore, many in the poor communities purchase the most expensive clothes, which have no resale value, and jewelry that is a sunk cost (they will not profit from that purchase at a later date).

During a recession, employers of the poor tend to reduce their hours or eliminate the job completely. Since many poor people have low credit limits on credit cards or ruined credit from past credit abuses, they may not have credit as a back up plan. Therefore, during a recession, the poor have a higher chance than any other group of finding themselves homeless and hungry.

To the poor, a recession is full of misery with more misery to come in the future.

The Middle-Class Stay Stuck

Those in the middle-class look at money as an unstable commodity – sometimes it’s in plenty and other times it’s in short supply. They don’t necessarily trade hours for dollars, as many in the middle-class have jobs with salaries and bonuses or they are self-employed. However, they are typically living close to paycheck to paycheck. They tend to have very nice homes, cars, and clothes. They tend to go on some very nice vacations once or twice a year. They can dine out at nice restaurants from time to time. However, they are always in danger of losing it all.

The middle-class both invests and spends their money. They understand the concept of investing and see it’s value as the wealthy do. Just prior to this recession, many in the middle-class were enjoying investments that seemed to be soaring in an over-inflated economy. They continued to buy investments at high prices while expecting the value of those investments to continue to go up. In other words, they bought high. When the market began to plummet, and the value of their investments began to reach rock bottom, many in the middle class began to sell their investments. They did so in order to save at least some of their money. The net effect though is that they sold low. To profit, you should buy low and sell high. They bought high and sold low, which is the formula to lock in losses.

The middle-class spends the way the poor do. They spend their incomes and bonuses on more “stuff” that will not return a profit to them. They save through a 401K plan, and then borrow against it to purchase a bigger than necessary house or luxury car. They feel comfortable in monthly payments, and credit is extremely important for more purchasing power.

During a recession, the middle-class are focused on protecting what they have. Their jobs are in danger of being lost. Their businesses are in danger of going out of business. They may have an income stream, but it’s all from one source. The middle-class invest, but they wait for social proof from others before investing and can often miss the timing that the wealthy have. Meaning, the wealthy invest at a lower cost than the middle-class. The middle-class can also over extend by investing or spending more than they can safely loose. The middle-class budget is based on their ability to pay credit minimums. However, if their income source is lost, they quickly find themselves under water.

To the middle-class, a recession is a time of great fear and uncertainty. So afraid of being poor that become overly conservative at their jobs, which makes them fail to stand out. So afraid of losing more money, they don’t invest at a time when it’s the most affordable and profitable to do so.

So, What Now?

Regardless of what your economic class is, you must first change your perception if you wish to change your economic conditions. What you focus on determines your reality. So, focus on finding the opportunities, and not on potential loss. Focus on where you want to be after the recession, and not on the thought that you have to stay where you are forever.

Many great businesses were born with little or no money, a good idea and a website during a recession. Many great partnerships were formed with a person with the passion and the idea matching up with a person with the money and the belief that it could work. Many people raised themselves from poverty to wealth because they were tired of always being one decision away from being out of a job.

Know that you can take steps today to prepare for the prosperity cycle that follows recessions. Know that you can take steps today to ensure that when the next recession comes around, you are positioned to benefit from it instead of becoming a victim of it.