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Rich Richer Poor Poorer

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If you look around, you may realize that there is a trend that the Rich Get Richer while the Poor Get Poorer. Why?

Actually Singapore is currently having one of its best golden years in history, with opportunities abound, it is possible for someone who is not Rich to BECOME Rich.

Can someone who is NOT rich become Rich? Yes, it is possible. One of the SECRETS why the Rich get Richer is that the Rich UNDERSTAND and USE Other People's Money (Financial Leverage).

How can you use Other People's Money (OPM) to become Rich? One possible way is to use good debt wisely.

The Good Debt that almost everyone has access to is a Housing Loan.

P.S. please avoid all bad debt. My definition of bad debt is any debt that you incur which you do not have a chance of making more money than the interest you pay is bad debt.

What is my definition of Good Debt? Good Debt is any debt whereby it is possible to get a higher return than the interest you pay on the Loan.

If you really think about it, Housing Loan is the CHEAPEST Loan anyone can ever get. Currently in Singapore, Housing Loan interest rate is 3% to 4%, while Car Loan is about 6%, Renovation Loan 8% and Credit Card 24%!

Actually, if one seriously think about it, it is very difficult for people to FAIL to beat Housing Loan interest rates. Why?

Imagine even if you know nothing about investing. Just putting money into Endowment savings plans gives you annual returns of about 4% over a 20 years period.

What about investing during crisis? Typically, a crisis comes by every few years and at least once in 12 years. During the last Asian crisis in 1998, DBS's share price was only $5, if someone only invest during a crisis when share prices are depressed, it is almost definite that the returns he earns will beat the interest rates charged on Housing Loans. Today, this person can easily sell off DBS's shares at over $20 (or 400% returns over 10 years or annual COMPOUNDED returns of 14.86%.

Let me show you an example:

A person has a $200,000 loan with 20 year loan period. Assuming he pays 4.5% interest on Housing Loan, total interest paid over 20 years is ONLY S$105,515.

If he has $200,000 Cash/CPF and use this money to earn 3.5% interest rate, in 20 years, total interest he earns would be S$168,453.20!!!

Because most people forget that Housing Loan interest is calculated on Reducing Balance Basis while your savings Compounds (interest is added on interest)!

I have to reiterate that from my observation the reason why many people end up retiring with a fully-paid house and little Cash/CPF are:

1. they commit to buy TOO big a house (more than they can afford).

2. they keep using their Cash to reduce/pay off their Housing Loan whenever they have excess cash on hand.

They would get ahead financially if they instead FOCUS on making their Cash/CPF work harder for them.

By doing so, it's possible for an average Middle Class Singaporean to accumulate S$1 million dollars by age 40.

Anyone who has excess Cash now I would advise you against using the money to reduce your Housing Loan outstanding. In my opinion, the next Global Financial Crisis can be 3 months to 2 years away and when the crisis comes, you would then realise it is very easy to make 50% to 200% returns on your capital. I've already shown you actual record of share prices in the previous Asian crisis to prove that it had happened before. The only question you need to ask yourself is when a crisis comes, will you have cash to invest then? You can move up from middle class to become Rich in the next crisis if you keep your excess cash instead of use it to reduce your loans now.

Copyright (c) 2007 Dennis Ng

Rich Richer Poor Poorer

Well the major reason is quite simply that the rich have the capacity to invest their money into assets and investments that will make their money grow over time, whereas the poorer people in society don't have this option.

The wealthier members of society can invest their hard earned cash into the stock market, property, or even into starting up or buying their own business. They can essentially make their money work for them and increase their wealth all the time. They don't need to worry about finding a high-paying job or climbing up the career ladder, they can simply use their money to make more money.

To demonstrate this let's take as an example a man who owns a $500,000 house outright and has $1,000,000 in a bank account.

Historically we know that house prices on average double every 7 years, so just by doing absolutely nothing he could probably increase his wealth by $500,000 just by doing nothing for 7-10 years.

In addition he would probably want to invest his $1,000,000 in order to make it grow, so let's say he invested it in a very conservative mutual fund that generated a modest return of 10% a year on average. In this case he would be increasing his net worth by a cool $100,000 a year and if he compounded his returns he would have made far more than this each year. All this was achieved with absolutely no effort needed from himself.

Even if he'd invested all his money into a standard 5% savings account he still could have earned $50,000 a year and after ten years with compounding his $1,000,000 would now be worth $1,628,894, a return of nearly 63% over 10 years.

Of course he could have achieved much more than this by investing in businesses, or actively buying shares or property, for example, but as you can see if you have a decent sum of money you can quite easily build a large income for yourself and make your money grow without actually having to work for a living.

Contrast this with a man who earns say $15,000 a year in a job and rents his own property. In this case he is probably spending all his income on rent and living expenses and will have no disposable income to save or invest, and even if he does he's unlikely to be able to get rich from doing so.

He doesn't have the capacity to make his money work for him because he needs most of it to just get by, and of course over a number of years he won't benefit from any long-term increases in property prices because he is renting his own place, so he won't increase his wealth this way either.

His best hope is to work his way up the career ladder or raise enough money to be able to start his own business and hope it becomes successful, but this is not easy and definitely not something everyone can achieve.

For most poor people who are living from paycheck to paycheck, it is really hard just to survive let alone get richer, and although they may not necessarily get poorer in real terms, ie their income doesn't go down, with the effects of inflation over a number of years they are essentially becoming poorer because the cost of living is going up.

Is this fair? No of course not, but it's part of the western society and unfortunately a sad fact of life. The only consolation is that there are lots of opportunities out there for people from all backgrounds but in most cases it's essentially true that the rich get richer and the poor get poorer.

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About Author

Both Dennis Ng & James Woolley are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Dennis Ng has sinced written about articles on various topics from Finances, Debts Loans and Finances. Dennis Ng is a Certified Financial Planner with 15 years of Bank Lending experience. He is known as a Housing Loan expert and often quoted in newspapers. He founded

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