4/07/2015

Albert Einstein's Poverty Equation: Why the rich get richer, and the poor get poorer

 "Compound interest is the eighth wonder of the world.  He who understands it, earns it... and he who doesn't, pays it." ~ Albert Einstein
Have you ever wondered why the rich get richer, and the poor get poorer?

Marxist and free market capitalist theories aside, it's really a pretty simple matter of understanding the above quote by Albert Einstein.  If you can grasp this idea, you can feel free to ignore just about everything a politician says about the issue in the up and coming presidential election in America.

The reason the rich get richer and the poor get poorer is a simple matter of arithmetic:  Rich people get richer, because they have math working on their side.  Poor people get poorer, because they have math working against them.

Simple enough, right?

Consider Bill Gates.

He has an estimated net worth right now of about $89 billion dollars.  Imagine if all this money was sitting in a savings account, earning 1% of annual interest.  That means without doing anything except letting his money sit in a savings account and earning interest, Bill Gates would earn $890 million dollars in one year alone.  That means he would make more than a million dollars every day before it is even lunch time.  His situation goes from great to greater, and all because of simple math.

Now consider the average poor person.

They live paycheck to paycheck, and are never able to save much of any money.  While driving to work one day, their car breaks down.  Not having enough money in the bank to pay for the repairs, but needing to make them because their car is the only way they can get to work, they sign up for a credit card at the auto repair shop in order to finance $2,000 to get their car fixed.  And at the end of the month, they receive a bill in the mail from their credit card company saying that they need to make a minimum payment of $60 a month for the next few years.  Living paycheck to paycheck as it is, they aren't really sure how they are going to squeeze another $60 out of their budget this month, let alone next month, and every month thereafter for the next few years. They try hard, but eventually "life happens" and they miss a couple payments in a row.  And suddenly they discover their balance of $2,000 has grown to $2,200, and they now owe $75 a month.  Their situation goes from bad to worse, and all because of simple math.

Albert Einstein was onto something.  Compound interest is an amazing thing.  It has the ability to make the rich even richer, and likewise, it has the ability to make the poor even poorer.  Compound interest impacts everybody in this world.

Compound interest impacts the rich, it impacts the poor, and it impacts you.  

Rant and rave all you want about economic and social injustices, real or imagined, at the end of the day rich people get richer, not because they are busy screwing over poor people, bribing politicians, and exploiting the working class.

The rich get richer simply because they have learned how to put the money they have to work, and to take advantage of the simple law of compound interest.  The poor individual, unfortunately, experiences the devastating impact that compound interest has on his life.  What turns out to be a positive experience for the rich ends up turning out to be a negative experience for the poor.  What creates wealth for one person ends up creating poverty for another.

As Einstein said, he who understands how compound interest works will earn from his understanding.  But he who does not understand how compound interest works, will pay for his understanding.

2 comments:

  1. Hi,i like your info. We need to start our Mathmatical Equation.

    ReplyDelete
  2. Nice, it seems like you're sharing this to teach yet, the unteachable don't care and those who do most of the working and dying are slaves.

    ReplyDelete