When I tell people about “generational wealth”, they look confused.
When I tell people that “capital begets capital”, they look even more confused.
In the absence of money, an income creates it. When your money has enough mass and scale, it creates income.
The power of proportions
Everybody knows about proportions. 10% of a hundred is ten. These things are obvious.
But we never actually think about what proportions mean at scale.
Let’s think about proportions for a moment.
If you had $10,000, and there was some company that paid 10% in dividends each year. For the sake of the argument, agree that this company exists (Currently, IEP pays about 15%). At year-end, you would have $1,000 on top of your $10,000. That’s without stock price movement.
If you had $1,000,000, and you did the same, the year-end payout would be $100,000. That’s pretty crazy.
The answer is both, but in and the reason is in the capitalistic system. The United States is the world’s strongest economy. However, with that strength and power comes issues.
Capitalism rewards innovation. If you find new technology, you are allowed to distribute it to the lengths that the law permits. When it comes to amassing pure gross domestic product, capitalism rules. When it comes to optimizes for the absolute maximum, capitalism wins.
Capitalism, more importantly, rewards the innovator. The innovator is also known as the owner of the capital. Because she owns the underlying entity that is being used to produce that innovation, she is owed most of the pie. Capitalism, as a way of distributing that wealth in a fair way, has a lot of trouble. There are ways that we attempt to manage this problem; one of them is a progressive tax system. However, even a progressive tax system is fairly easy to maneuver in the United States.
As it stands, most of the rich create their money through their accumulated nests. Their accumulated old money makes the new money. And it makes that money in the magnitude of several salaries. The median household income in America is between $40–60,000. As we went through in the above example, a million dollars in IEP will generate a magnitude of two times a median household income — and you’re not actually doing any work yourself yet.
Wealth and income creation have fundamental interplay. Without any money, your main source of money is generated by your income. The next step is trickier:
- Your income becomes astronomical, in which case your money is also astronomical.
- The savings portion of your income over a period of time can accumulate, in which the exchange of that savings for investment can produce meaningful income in the future.
Understanding the roots between money and income is the start of true wealth creation. The more you have, the easier the next step becomes. Every step up leads you into a more exclusive club of people with the same financial status as you.
Getting to a critical point of wealth — that’s the race nobody is thinking about.
Often, people think about richness. They’ll think about the fairytale, the massive income, and the infinite income.
Most of the money, however, is generated in the background, where nobody is looking.