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We’ve all heard that saying “the rich get richer and the poor get poorer” and I have to say that this fact is actually very true. There is however a very good reason for this and it has nothing to do with rich people being bad and taking money away from poor people as the saying sometimes implies. It has mostly to do with financial education and spending habits.
First let’s define assets and liabilities. My mentor, DR. elikael at UDSM would say that ‘assets’ are anything that puts more money into your pocket than it takes out. A liability is anything that takes more money out of your pocket than it puts in. This means, that if you own a home and have a mortgage with interest, it is not an asset. That also goes for your cars, and other high priced items. Liabilities on the other hand, are purchases that you pay for in order to get them, keep them, use them, or repair them. If you receive income from them by renting them to others and it does not exceed the expenses to maintain them, it is still a liability.
Let’s say you bought a HTC Desire S 510e and it cost you around TSH 200,000/=. It would never become an asset because it would continually take money out of your pocket even after you purchased it. Once you got around to selling it 5-10 years later you would get less than your purchase price and thus prove that it was a liability. Now on the other hand let’s say you creatively financed and bought some investment real-estate with your Tsh;250,000 that netted you a cashflow of Tsh 5000/=month. That 5000/= tsh in rental income could go towards financing that phone and even when it was time to sell the phone you would still have that cashflow.
What do the poor & middle class do?
The poor and middle class usually stay ‘poor’ and ‘middle class’ because of their mindset and financial education. Once they get more money than they need for expenses, they usually spend it on liabilities. The energy, time and labour from working for their money now effectively goes “out the window and down the toilet,” as my mentor used to say. That money is never seen again. Here are some examples of purchases that the poor and middle class make with excess funds:
Food
Entertainment and entertaining others (parties etc.)
Costly electronics
Trips
Household gadgets
Clothes & jewellery
·Vehicles
What do the rich do?
The rich purchase assets that create positive cashflow, portfolio and passive income. Some examples are:
Stocks, bonds, mutual funds, etc
Investment real-estate
Businesses
thanks for reading although its too long
by festo matongo
economics teacher.
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