This article wonders why the rich are getting richer and the answer is compound interest.
Having $1 million in the bank will reliably generate between $25k and $50k per year.
Having $2 million in the bank will reliably generate between $50k and $100k per year.
Having $3 million in the bank will reliably generate between $100k and $150k per year.
So someone with $3 million in savings and still working their 200k job will be making nearly the same amount as their savings is generating. If they keep working and don't spend their principle, they'll have another million in about 5-6 years.
For someone putting 30k away each year in savings, it will take them decades to reach the first $1 million.
This is why the rich get richer. It's not about salary. It's about savings and investment.
Nooooo. When they talk about the rich getting richer, they aren't talking about a particular person getting richer. In that respect, we are nearly all (well at least those with good middle-class jobs) getting richer - we get pay rises, we save, we make investments etc.
But that phrase is actually talking about the type of comparison where you have a look at, say, the top 1% of earners, and compare their income to the bottom 50%. We see that the ratio of the average earnings of the two groups is swaying to in favour of the top 1%. That is not nearly such an obvious result. Rich people die, they split up their fortune to give to their children, which should help level things out, but no, we still see that segment of society getting steadily richer faster than anyone else.
Another way of looking at it would be to compare velocity to acceleration. You are talking about the rich having a bigger velocity increase for the same acceleration increase, which is true. But the phrase "the rich are getting richer" is actually talking about the fact that the acceleration is actually higher for the rich - they can get a 10% increase in wealth per year, were as a middle-class person might only get 3% for their tiny investment.
* No, there aren't zero-risk places you can earn 5%.
* If you make 2.5%/yr on interest and spend it instead of adding it to the principal, your wealth is actually declining (average inflation 2000-2009 was 2.56%). And your 3-millionaire will actually get their 4th million in about 10 years (15% cap gains tax), at which time inflation will have done it's work nicely, wiping out most/all of the gain.
That said, you're absolutely right that the rich get richer because of savings and investment. Millions in savings can be invested in a lot of different ways that can outpace inflation (though nowadays, there's a bit more risk in the old standbys like the stock market and real estate).
I know of no such bank offering interest rates even close to that. You're talking 2.5% - 5%. That's unheard of these days. At my current bank, $1M in a money market account would generate about $2,500/year, which is nothing short of insulting. Who are these fabled banks offering 10x the interest rate?
I think your mistake is in assuming that he meant a standard, FDIC-insured savings account by "in the bank." It's not terribly hard to find ~5% dividend yields in the stock market, particularly if you look outside the United States.
Further, in the US, once you have a net worth of a million dollars, you qualify as an accredited investor, opening up a plethora of new investment opportunities to you.[1]
ING Direct gives you 110bps, 125bps fixed rate if you are willing to tie up your money for at least 2 years. Several other internet-only banks will do the same. As for 250-500bps, I have no clue where to get that. Maybe he meant you can get 5% with a S&P ETF?
Before the subprime crash in 2007, interest rates were well in that range. I had an ING savings account(regular savings account, not a CD) with a rate that was earning me $7 per day, as opposed to now in which I get maybe $2 per month.
Yeah, I know, interest rate used to be good. I used to get 5% on my emigrant direct savings account. Now it's 1%, and I don't know of anything higher (for a money market account anywys)
> Who are these fabled banks offering 10x the interest rate?
As usual it depends on country. In Australia the standard savings rate is around 4% at the moment. I can go to my bank and get 6.2% PA term deposits on a 7 month term.
Indeed, (relatively) risk-free interest rates available for modest amounts of money currently do not exceed the rate of inflation; money in the bank is money declining in value.
Having $1 million in the bank will reliably generate between $25k and $50k per year.
Having $2 million in the bank will reliably generate between $50k and $100k per year.
Having $3 million in the bank will reliably generate between $100k and $150k per year.
So someone with $3 million in savings and still working their 200k job will be making nearly the same amount as their savings is generating. If they keep working and don't spend their principle, they'll have another million in about 5-6 years.
For someone putting 30k away each year in savings, it will take them decades to reach the first $1 million.
This is why the rich get richer. It's not about salary. It's about savings and investment.