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Money Management

3 Big Differences Between the Rich and the Poor

By February 14, 2024No Comments

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There are some significant differences between how the haves and have-nots manage their money. But it’s not always about personal choice. Learn more here. [[{“value”:”

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As anyone who’s ever struggled with money knows, the amount you have access to makes a huge difference in how you approach your finances. And, contrary to often-peddled criticisms of how people with fewer means manage their money, there are a lot of reasons beyond personal choices that differentiate their habits from the rich.

Here are three key differences between how the haves and have-nots use and approach money.

1. Long-term financial planning

One key aspect here is the ability to use your funds in a way that is beneficial to your future finances. For those who are living paycheck to paycheck on an already trimmed-down budget, for example, the number of choices you have is significantly smaller than it is for rich folks. After all, if you’re struggling to put food on the table, it’s unlikely that you’ll allow yourself to consider saving for future emergencies that aren’t yet impacting you when those funds are already unavailable. The idea could even seem laughable because of how impossible it seems.

Conversely, if you have money to put into savings, and a significant amount of it, too, you can start thinking about protecting those assets because you have the means to do so and it’s the best option available to you.

There are knock-on effects to this lack of choices for lower-income people, too. For example, they may be losing out on the interest that could come with an emergency fund in a high-yield savings account. And, over time, any money they do stash away in a basic checking account (as might be the case since lower-income folks may need faster access to any savings they accumulate) could be losing value thanks to inflation and comparatively poor returns on those accounts.

2. Focus on credit card rates versus rewards

A recent study from the Motley Fool Ascent found that millionaires are less concerned with credit card interest rates compared to the average American. Instead, they put more stock in travel and cash back cards, favoring those types of rewards. And it’s easy to understand why: When you reach the upper echelon of earnings, taking on debt isn’t necessarily a concern since you may already have the funds to pay off your balances. And, at certain levels, paying interest isn’t even a significant financial threat.

For example, let’s say a millionaire racks up $20,000 in credit card debt, with an 18% interest rate. If they make the minimum monthly payment, they’d pay $21,556 in interest alone over a 93-month period. That represents roughly 0.28% of their annual income, assuming $1 million in earnings. That’s less than a single percent of their earnings. But for someone making $30,000 pre-tax, that represents about 9.3% of their income. So it makes sense that low-income individuals might focus on saving money on high-interest debt instead of getting rewards.

3. Ability to leverage debt

For the wealthy, taking on debt doesn’t necessarily work the same way as it does for the rest of us. Or, at least, they are able to use it in a way that typically isn’t afforded to the less well-off. For example, let’s say a millionaire has $500,000 that they could use to purchase a house outright. They may still choose to take out a mortgage, and use that money to invest in another opportunity to make money, such as a new business. That means the return on that investment could eventually outpace the interest rate on their mortgage. In other words, they can use debt to make more money, and minimize their losses. This is a simplified example, but the principle applies.

For those who are not wealthy, however, debt can work less as a tool and more so as a financial safety net. For instance, someone who doesn’t have room in their budget to cover an unexpected $500 car repair, and needs that vehicle to get to work, might choose to charge that cost to a credit card, and simply pay the interest for as long as it takes to pay off that balance.

Having more money can be more difficult to manage because there is more of an element of choice. But for those who are living paycheck to paycheck, the lack of financial choices often necessitates a completely different approach to money management, even if that means giving up some opportunities. So it’s important to keep that in mind when considering how different classes of people approach their finances.

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