Why the rich get richer and the poor get poorer… asset owners vs liability owners

There is a very simple reason why the rich get richer and the poor get poorer. The rich, in general, are asset owners, while the poor, in general, are liability owners.

If we compare the spending behaviour of asset owners to that of liability owners, it soon becomes clear why asset owners get richer and liability owners get poorer.

Liability owners are most often income earners who exchange their time and labour for a salary. The problem is that no matter how willing and able income earners may be, their time and labour – and therefore their earning capacity – is limited by the number of hours a day. They have no way of increasing their earning potential, so they spend what they have to cover their expenses and save or invest what little is left.
Asset owners, on the other hand, own assets that generate an income for them. Asset owners do not pay interest; they earn interest and other forms of passive income. The assets that produce this passive income are acquired by getting a loan from the bank and using other people’s labour to pay back the loan.

Because they understand that passive income is the key to wealth creation, asset owners invest in income-generating assets first and then spend what money is left. They do not make lifestyle debt – such as clothing accounts or credit card debt for living expenses – on which they have to pay hefty interest rates. They make only “good” debt – debt which finances assets that will appreciate in value and will generate an income. 

Article by P3 Moneywize