This question came up after reading this question (stock market long term risks), in which it is re-iterated (as it has been many times on this site), that investing in the stock market, especially an index fund that tracks the top 100 / 500 companies in a country, basically always has great returns in the long run.

So my question is: Why isn't everybody rich?

If it is so easy (basically invest as heavily as you can in your youth to be rich into middle age and older), why doesn't everyone do this? There would be no need for pensions or any other savings or financial security that way, why even bother investing in assets like property that you have to manage when you can just have an index fund work for you?

I'm guessing that something is being missed here.

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    Comments are not for extended discussion; this conversation has been moved to chat. No new comments will be accepted on this question. – Ganesh Sittampalam Apr 25 at 7:46

21 Answers 21

up vote 229 down vote accepted

In my opinion the ability to have wealth comes down to one thing: Behavior. For many it is a tough pill to swallow, but once a person realizes that they have control over their financial future they can then act accordingly. However, many are stuck blaming some bogey man to retain the ability to behave how they wish.

There are countless examples of people who made an astronomical income, but spent more and ended up broke. Why? Because they behaved irresponsibly.

There are many stories of people of modest income who lived well below their means and became very wealthy. Recently I read a story of a couple, that most would have considered of modest means, that left their children a 10 million dollar estate.

The books of Stop Acting Rich and The Millionaire Next Door outline those who are not flashy but have very high net worth.

In my mind it is a pretty simple algorithm:

  1. Understand that you cannot duplicate your parent's household immediately. It took them 20-30 years to get there. You are just starting out.
  2. Get out and stay out of consumer debt (this includes student loans and car payments)
  3. Then start investing some money in low cost mutual funds.
  4. Save an emergency fund (3-6 months)
  5. Buy a modest home (15 year mortgage 10-20% down)
  6. With any extra income: give some, spend some, and invest a lot.

Some may say that high income is a key to building wealth. Perhaps they are right, but guess what happens when you follow and stick to a plan? Your income will rise. What will come first a high income or a disciplined life? Perhaps they build on each other.

Update About Education: I very much believe in education, two of my children are currently seeking terminal degrees, as is my wife. I hold a masters. However, education needs to be made as a business decision and student loans, if taken, should be minimized. No financing a BMW with student loans or lavish lifestyles.

Now if one has an educational interest that is not likely to lead to a higher paying career, NP. Simply take those classes as one desires but pay cash for them. Recognize they are a luxury and it would be silly to take out a student loan for such a luxury.

Some simple behavior changes would pretty much eliminate the "student loan crisis".

An example of behavior that can make one wealthy: Stop smoking. If a person starts smoking a pack a day at age 18, they will currently spend about $5.51 per day (national average of the cost of a pack) or $165.30 per month. If however, instead of actually buying cigs, they instead invest it in a S&P500 index fund they can become wealthy even if they do no other investments. By 65 they will have $1.8 million or so.

So choice is yours, one way gives a person lung cancer, the other makes them wealthy.

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    Given the number of flags on the comments, it seemed time to purge. Further comments added here will be deleted with prejudice. – JoeTaxpayer Apr 25 at 0:08

It all comes down to 2 things:

  • Financial illiteracy
  • Insufficient initial capital

For the first point, a very low number of people even possess basic knowledge of finance. If you don't know any better and learning basic economic concepts is disregarded throughout your upbringing (be it in education or parenting), then it's highly unlikely for you to eventually find interest in them. Add on top of this the ongoing culture of instant gratification, glamour and overspending and you have a recipe for disaster. Few people will get to think that by postponing indulgence and through being prudent they can secure their future mid to long term.

For the latter, if you're too occupied making ends meet and surviving, chances are you won't have the time or capital for any meaningful investment of any sort. When 14% of the population of the USA or alternatively 1/2 of the total Earth's population lives in poverty, this becomes even more apparent.

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    It's worth noting here that the 14% and 50% figures cited in your last paragraph are using very different definitions of 'poverty.' The percentage of people in the U.S. who fit the definition used for the worldwide number is approximately 0. – reirab Apr 25 at 14:31
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    @reirab that's true, in retrospect, the amount of Earth population living in poverty, going by USA standards would also be greater than quoted. – Leon Apr 25 at 14:41
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    Indeed. The worldwide figure would probably be closer to 90% if using the U.S. metrics, possibly more. Granted, the U.S. measure kind of sucks, as it doesn't take purchasing power parity into account (which is why the cited percentages are so high.) It's purely based on nominal income, so someone making $20k in downtown SF is treated the same as someone making $20k in a rural part of the Southeast, despite costs of living often differing by a factor of 3 or more. – reirab Apr 25 at 14:47
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    Expanding on point 2, at some point into "everyone" investing, only those with a certain level of capital will be seeing meaningful gains, there's only so much value being created in the world, and investing itself doesn't directly create any, so it's by definition impossible for everyone to become rich by doing it. – Llamageddon Apr 25 at 15:41
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    A third factor is privilege. – Hot Licks May 1 at 0:22

Because you have to be rich to get rich!

Let's set up a model calculation.

(don´t get hung up on these numbers - do your own calculations with your own goals and premises!)

  • I define be rich as owning $1 million
  • Average return on your funds 7%

Say from age 0-10 you get some money from your family, because you are lucky, and your parents put it an an index fund instead of a savings account. Let´s assume they are well off and you get $100 per month. (I guess you are in the top 5% even in America.)

After your early childhood you have: $17,208.59

Now you start mowing the neighbor's lawn once a week, getting an additional $100 a month. You save everything.

When you are 15 you have $38,460.75

Now you start working after school. Let´s say you make $600/month and your family, recognizing your enthusiasm, ups your savings to $200/month. Still you live on your parents' money.

When you are through with high school at 18, you have now $79,149.34

For the sake of simplicity, let´s say you get an incredibly good offer to start directly in your uncle's business, whose favorite nephew you are, and get offered a position without even going to college. Your Salary is $80k and you are able to save full half of it, eg $3.3k per month.

You are a millionaire at 31!

Even with this incredible luck you needed to contribute $567.600 out of your own pockets to make up the rest in interest.

Anything on that vita that seems unreasonable to you? Most can´t afford to put away even a fraction of that until out of college and then, they probably have to pay back student loans first.


OTOH: What would happen if we all got enough funds to retire at age 30-40? We would stop making things, so things would get more scarce - which would increase prices. So our returns would no longer cover the costs of living, so we´d have to start working again ...

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    Comments are not for extended discussion; this conversation has been moved to chat. Further comments added here will be deleted with prejudice – JoeTaxpayer Apr 28 at 11:19

Because “rich” is a result of an uneven distribution of wealth. Last I researched, the total US wealth divided by the total population resulted in $160K/person. $320K/couple is not rich. The median wealth number is far lower than this to offset those with millions, and of course, billions. This is how we get to the articles that mention how the top few families have more total wealth than the bottom 50% combined.

In the end, anyone who can save 15%, keep investing costs low and their own budget reasonable is likely to be able to retire to the lifestyle they’ve grown accustomed to.

My wife and I did just that, 15% plus 5% company match. As we approached the point where 4% of savings was enough to cover our budget, it was time to call it quits. I retired at 50. Nearly all of our retirement account was invested in an S&P index fund.

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    The way we get the articles about the top few families having more net worth than the bottom x% is because the bottom y% has negative net worth (e.g. recent graduates with student loans and not much in the way of assets, people in credit card debt, etc.) and it takes the other x - y% to get the total back up to 0. Back around '08-'09, this was a much higher than normal percentage of the population because of a lot of underwater mortgages. The top few families own about a small fraction of 1% of U.S. wealth. – reirab Apr 25 at 5:03
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    The original claim that spread quite a bit was about the Walton family. The claim was that they had more net worth than the bottom 30% of Americans combined. The claim was technically true at the time. Of course, the claim was also true of the author of the claim, as well as of you and me because we have non-negative net worth. The actual percentage of U.S. net worth owned by the Waltons at the time was 0.13%. – reirab Apr 25 at 5:11
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    @JoeTaxpayer The top 1% isn't a "few families," though. It's about 3,250,000 people. Of course, the distribution is definitely uneven - no arguments there - just not quite as uneven as some people abuse statistics to suggest. – reirab Apr 25 at 14:22
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    @Ctrl-C There's always the chance that the OP was unaware of the distinction. This gets right to the misunderstanding which is evident in the OP's thinking (and mine as well, if I'm honest). Sometimes, we must understand the terms more clearly in order to ask a better question. – jpaugh Apr 26 at 14:59
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    @reirab Source needed for " 'rich' is literally defined in terms of having a far-above-average income." For example, Merriam Webster defined rich as: "having abundant possessions and especially material wealth" – NPSF3000 Apr 26 at 17:36

First of all, "rich" is not an absolute term, but relative. Compared to people a thousand years ago, we are all fabulously rich - we possess invaluable boons such as modern medicine, electricity, cars, industrial machines, the internet, advanced education, and so on. Actually, even within our time, even the poor people in first world countries are rich compared to people in third world countries, both in terms of the "nice things" they have (like smartphones and tasty food) and in real financial terms (US federal minimum wage is several times higher than median income of many countries for instance). However, most people are not rich in the sense of having more money than others in their community. This is a consequence of statistics - wealth can be distributed in three ways:

  • Evenly, which is the egalitarian utopia where everyone is equally wealthy and consequently no one is rich (though they may possibly have very comfortable lives)
  • Top heavy, where most people are about equally wealthy, but rich by virtue of being more wealthy than a small minority of horrendously poor people
  • Bottom heavy, where a minority is much more wealthy than everyone else

Your question sounds like the first option, or possibly like the second option. It so happens that in our world and in history, we always see the third option. The reasons for this are complex and have literally spawned whole disciplines, so I won't go into them here. But your question also asks some specific things about markets, so I think it's worth examining those in detail, so that rather than saying why everybody isn't rich, we instead look at what's to stop anybody from getting rich.

Of course the vast majority of the population is utterly ignorant about investment and good financial discipline. A lot of people don't even realize they can invest in stocks, they don't know how, they think it's a scam like a casino, they're frightened because they don't understand how it works, they don't have the patience or interest to read up on it, and so on. But knowledge and willingness are not critical factors, because even among experienced investors and traders it's rarely the case that everyone gets rich. The reason is that strategies such as buying the S&P are not such no-brainers, as you would expect TANSTAAFL, and the supposedly guaranteed returns are actually not so guaranteed and imply significant risk.

With any long term investment, you have to keep in mind that safe as the investment may be on paper and indeed in reality, life can always throw a curveball at you. Suppose I had a deal for you: You give me $100k now, in 30 years you can cash out $10 million. For the sake of the argument let's pretend this is for real, I'm backed by the FDIC or whatever, there's no way you won't get your 10 mil in 30 years. But if you cash out at year 29, you only get 100k. Now suppose you buy into this, and then a year later you get a deadly disease that costs $90k to cure. Now maybe you can get a loan, maybe you can use the investment as collateral, maybe you can work something out, but the point is that even a zero risk investment cannot be made without risk, because living by itself carries inherent risk. Things like unexpectedly losing your career, health problems, natural disasters or unexpectedly early retirement you can count under this.

The index also doesn't return so much as to make capital irrelevant. You still need a significant chunk to start, comparable to what it would cost to buy a house. Most people don't have that (millions of Americans don't even have net worth greater than zero). The average is considered to be 7% annual, so if you got a steady 7% every year for 30 years, your money still only goes up about 8-fold. If you started with 10k, you now have 76k (a big chunk of which may go to taxes). Hardly much richer than you were, and maybe you could have found a better use for those 10k in the three decades it took. In reality, the market doesn't even return a steady 7%, so you would get significantly less than 1.07^30 in the end.

In the very long term the index has returned about the same regardless of "timing", but timing does make a difference. You can set yourself back by almost a decade of gains by buying in right at the peak. In fact the peak is exactly when you will feel most confident about investing because the "the market always goes up". Furthermore, the long term upside presupposes actually holding it that long. What if an emergency happens right as you wait out a crash - you will be forced to realize the paper loss. More commonly, every time there is a crash, you will be very tempted to sell and cut your losses. It's not merely a matter of mental discipline either - the past growth in the index does not guarantee future returns and it could stop growing any time. What would it take for you to stop holding the bag and walk away?

Also, something that I think often goes unnoticed is that it is mostly the US indices that look attractive. Few other countries' look as good. Most economies are already less stable than the US's, but also when the US does crash, the other indices tend to crash with it, but rarely recover as vigorously. The point isn't to agonize over which country's index is better, but to recognize that the tremendous performance of the S&P is a reflection of the prosperity of the USA as a country. It's not going up and up "just cause", but because for the three centuries of its existence, the USA has generally been a country blessed with tremendous natural advantages, a very industrious, productive population and a government that stewarded these resources well. This could change any time, and the US (or whatever other stable country you live in) could become like those "other countries". The principal fundamental support of the supposedly guaranteed S&P growth would thus be destroyed, and your investments would be toast - forget gains, you'd be lucky to walk away with your principal. It sounds fantastic, but when your horizon is 20 or 30 years you have to consider these things. History is full of economies that were doing better and better, with everyone wondering where it'll stop, until they did stop. Then nobody wonders anymore. There's a saying on Wall Street - trees don't grow to the moon.

There are also other "safe" strategies like value investing (as famously championed by Warren Buffet) - but if you read Buffet's book for instance you see that it's not just "buy at low PE", you have to do some serious research and analysis to vet the companies you look at. Not everyone can do that. Some companies have low PE, because their business is doomed and the market knows about it. Sometimes a company is overlooked by the market, and the market keeps on overlooking it when it's time to sell your stock and cash out. And so on with every other sure bet strategy, there is never much reward without risk and hard work.

Furthermore, it's worth considering that when you buy an asset, and sell it years later for a profit, where's that money coming from? It's not like you did much work to add value. Somebody must have bought high and sold low. In some sense, the economy is probably not zero-sum and you provide liquidity and so on. You can for instance consult the GDP, which for most countries (including USA) is growing. But the growth is modest, so I'd suggest a large part of your gain is someone's loss. So going back to "why isn't everyone rich?" - because you can't get rich from stocks without someone else (many someone else's, in fact) getting poorer. The economy just doesn't grow that fast.

But all of that said, many people have no fiscal strategy whatsoever. They don't save at all, or keep it all under a mattress or checkings account. These people would certainly benefit from budgeting a savings rate, and (after doing the research and consulting with a financial advisor) investing part of their savings in stocks and/or bonds. And S&P funds are a pretty good option for the former. But it's not a question of getting rich, it's a question of not getting poorer.

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    Maybe people might not even wonder where the growth will stop; They just believe. Most answers from this question(Link) are using market histories or technical analyses without mentioning the cause of long-term growth. – user2652379 Apr 25 at 2:42
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    Wow, very comprehensive compared to other answers. – kubanczyk Apr 30 at 14:28
  • Great answer. I actually opened the question to write "but everyone is rich - compared to everyone but kings from a thousand years ago, we have everything and then some". – Tom May 2 at 21:33
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    Awesome answer. One thing I see that warrants discussion, though, is the notion that your gain in the stock market is someone else's loss. (To me) That implies that someone got hosed, when in reality it could be as simple as someone giving Apple $1,000 for an iPhone. Sure, the consumer "lost" their money (even considering the value of the phone), but the exchange could hardly be considered a bad thing. Apple and their shareholders made profits, and consumers got neat widgets. The only losers in the equation is the Chinese slave labor (yeah... I guess I retract my criticism) – bvoyelr May 3 at 14:20
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    @bvoyelr That's a good point, and there are also other caveats as well. I left them out of my answer for the sake of brevity. You can indeed make money from a stock without anyone getting hosed. My point is that you cannot get rich that way. "Getting rich" I think implies growing your capital 10-fold or 100-fold or more. And those are certainly not returns "anyone" can get, certainly not from just blindly buying the index. The question, IMO, is about getting rich, and not "merely" making a positive return. – Superbest May 3 at 21:24

Most people have a high discount rate for their own money, meaning that they would rather have $1 now than $2 in five years’ time. Given such a high discount rate, there’s no point in saving, because no investment is likely to have such a high rate of return. They might well be richer in the long term if they used a lower discount rate, but they’re more concerned with the short term.

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    Turning $1 today into $2 in five years time would require a 15% interest rate, and no fees. It's hard to build up a useful amount of money, when you only have a small amount to start with. – Chris Jefferson Apr 25 at 13:27
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    Terse as it is, this little gem of an answer contains a lot of truth if you think about it. The subtly that prevents people from "getting rich" is that life happens, and people usually end up spending most/all their savings on major life events: marriage, birth, and house-buying spring to mind. If people could have the discipline/luck to manage a two-tiered savings plan, and delay dipping into their longest-term (retirement) fund until actually retiring, then there would be less financial insecurity in this world. Big"if." – MarkHu Apr 30 at 19:13

The answer is simple: the more people can get, the more they want. Most people today enjoy and expect things that in medieval times would only have been available to the wealthiest elites. The reason such people aren't considered "rich" is that such a term is generally used in a relative sense. No matter what state of material wealth a population achieves, 20% of the people are going to be in the top 20th percentile, and 20% of the people are going to be in the bottom 20th percentile.

As to why not everyone earns money in stocks, there are a couple of factors. Beyond the fact that some people might have more immediate need for money, the marginal value of investment beyond a certain point will generally go down as the amount invested goes up. Thus, the more people want to invest in a company, the less return it will be able to offer, up to the point that prospective investors would have better things to do with their money.

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    In theory, if a company can get more funds at the stock market, they can scale their operation with that and still offer the same returns (if they succeed). Of course if every company could get more funding, beause everyone invested in stocks, it would be much harder to succeed and demand for resources would drive prices and inflation. – Daniel Apr 25 at 8:15
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    @Daniel: That assumes that a company could sell a greater amount of product at the same price. – supercat Apr 25 at 13:42
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    That first sentence is fascinating. It assumes no one is ever satisfied. For most, that may be true, after all, multi-millionaires don’t all quit working. But not all. When I hit my number, enough to quit and live in the same lifestyle I’d had for the prior decades, that was enough. – JoeTaxpayer Apr 27 at 20:05
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    @JoeTaxpayer: But there are peope like me, who actually enjoy the work they do. One benefit of financial independence is that I can choose interesting work, set my own hours, telecommute, &c, removing most of the downsides of work. – jamesqf Apr 28 at 3:07
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    @jamesqf Indeed, value is subjective. To some people, doing work they love is more of a value than sitting on their ass doing nothing on benefits. My "rich" goal isn't "no more work and lots of stuff!", it's "I can work on the stuff I want to work on, disregarding income". That's how lots of people become "underpaid" teachers etc. How many couples do you know where one partner is a high-earner, while the other does some low-paid but high-subjective-value work? It seems to be pretty common. – Luaan Apr 30 at 7:54

I'll answer your question exactly as you asked it:

If it is so easy (basically invest as heavily as you can in your youth to be rich into middle age and older), why doesn't everyone do this? There would be no need for pensions or any other savings or financial security that way, why even bother investing in assets like property that you have to manage when you can just have an index fund work for you?

I'm assuming that you're asking why isn't everyone rich from investing in index funds, since index funds always go up in the long run (from your question).

  1. Index funds differ for markets. If you're US-based, you have some index funds that are standard, like the S&P 500. If you're Japanese, you have the Nikkei index. If you're Chinese, you have the Shanghai. Each of those have had good periods and bad periods, some lasting long some lasting short. It's easy to say "buy and hold" for everyone, but it's hard to do as events happen in those individual markets. It's very easy to become distracted. This is true for all cultures.

  2. Very few people invest, much less save. Many people in the US don't have anything saved for a major emergency, so where would they get the money to invest? The Chinese do save a lot, but saving 20%+ of income is pretty rare across cultures, especially in some of the countries in the west.

  3. Sacrifice seems easy until we do it and we have to buy index funds with something we've earned or have and are willing to sacrifice for the future. If saving money was so easy, why didn't we save 50% of our income we made before turning 18 'cuz most of us lived with our parents and didn't really have a lot of needs in those days? We always found reasons to spend! We also don't always feel we'll be there in the future, so spending now makes more sense.

  4. Stories on TV and in movies show us that rich people constantly spend, hang out with their friends, and commit adultery. You can laugh at this, but it's rare to see a TV show where rich people save money and talk about consistently buying index funds. I do remember a Big Bang episode where Sheldon talks about saving money, but it was a very rare moment on TV. Most TV is people spending money incompatible with their income. You can search the internet for people who do this type of analysis (Friends, Sex and the City, etc), but the take-away is that many of these TV shows portray a lifestyle that wouldn't be possible on the character's income and we seldom see the character working! That's what many people compare their life too - it's not real. The Millionaire Next Door is real, but wouldn't make an entertaining movie.

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    For a TV counterpoint, consider Mad Men. We see Don taking home lavish sums from his job and stashing them in his desk! Definitely someone who isn't living beyond his means. – Brian Apr 24 at 15:14
  • @Brian Good to know opposite stories exist!!! – Ms Jackson Apr 24 at 15:23
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    @Ms Jackson: A lot of people I know, including myself saved most 90% of their "income" in their youth since we did not have any fixed costs. It is just that this does not make a very big sum if your only income is some pocket-money. What we save we quickly consume during our first steps as young adults. – Daniel Apr 25 at 8:26
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    @Ms Jackson: Not so good when after 15 years of saving you can´t even pay for your driving license in full with it (living in europe) – Daniel Apr 25 at 14:08
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    To point 1: The Nikkei Index is a great example. Look at it historically: finanzen.net/index/Nikkei_225/Seit1973 if you bough in 1987 you are breaking even now (not adjusted for Inflation) and if you bought ard 1990 you 'only' have 50% loss until now. So the long run ist good, doesnt apply to all markets. – lalala Apr 29 at 12:03

Suppose when you were a kid someone told you about something you could do. It would only take five minutes a day and cost only a couple bucks a month, but doing it could save you thousands of dollars and/or shield you from a significant amount of physical pain over the course of your life. Seems easy, right?

And yet, every day untold numbers of people fork over thousands of dollars to dentists, and/or suffer extreme oral pain, because they didn't choose to do that thing, which by the end of this sentence you will have realized is "brush your teeth".

Or what if there was something even easier, because you wouldn't even have to do anything! All you have to do is not do something. Not only will this inaction not cost you anything, it will actually save you anywhere from $5 to $150 a month --- and by not doing this thing, you will likely save additional thousands of dollars over your lifetime, avoid not only physical pain but potentially catastrophic health effects, even including premature death, and by not doing this thing you will be helping the health of others in your household, all for free! Who could refuse?

And yet every day untold numbers of people light up a cigarette, paying money out of their own pocket for the privilege of worsening their health and the health of those around them, and setting themselves up for higher health insurance costs and large medical bills toward the end of their shortened lifespan.

Yes, of course, I am simplifying matters a bit here. (Like probably you do need to spend money to visit a dentist periodically to keep in good dental health, not just spend a couple bucks on toothpaste and toothbrushes.)

But the point is: people do a lot of things that do not make rational sense, sometimes not even to themselves. In some cases this is because we are unable to accurately predict how our future selves will value the things they do or don't have. (For instance, it may not be until you fork over $2,000 for dental work that you realize how much cheaper it would have been to brush your teeth.) In other cases, even if we have a fairly clear understanding of the pros and cons, we may simply be unable to summon the willpower to choose an option with a long-term payoff instead of one with immediate gratification. (There are plenty of smokers who feel terrible every time they buy a pack because they know they're killing themselves, but are unable to break their addiction.)

The same is true in money matters. At the end of the month you find you have $100 left over. Do you buy into the S&P 500, or do you opt for a night on the town? The choices that seem the most attractive to us in the moment are often not those we will wish we had made when all is said and done.

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    I'd love more examples of things to do (or not) every day with calculated approximated benefits. All lists of things to do every day I saw do not have any calculations, just vague statements that hardly inspire to really take action. – Ctrl-C Apr 26 at 11:38
  • This is highly relatable, my entire face hurts as I'm watching my bank account systematically empty due to dental bills because of precisely this scenario. – Ruadhan2300 Apr 27 at 12:43
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    @Ctrl-C google micromort for interesting stuff in this area – AakashM Apr 30 at 8:37
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    I love the examples, but I disagree that we don't understand why; one only need to look to evolution to understand why we are programmed not to choose the long term over the short. – virtualxtc May 2 at 20:30
  • the first paragraph hit me hard. an eye opener. – anar khalilov Jul 17 at 20:28

I'll make it short.

If you want to know why a lot of people don't invest their money, either they

  • don't know about investments
  • don't have spare funds to invest, or
  • would rather spend that spare money than invest it

However I'm not sure how the market would react if 100% of the population started investing in the way that you mentioned.

Also, as a broader question, "Why can't everyone be rich": if everyone has lots of money, then they're all on the same level and essentially no one is rich; that would just be inflation, richness is a relative concept.

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    Your last paragraph is on point. 30 years ago, 100K was a lot of money and could buy a really nice home. Few people made 100K a year then. Now, 100K is not so much and a lot more people earn 100K a year. – Ms Jackson Apr 24 at 18:00
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    You're right that richness is a relative concept and that it's, by definition, impossible for everyone to be rich (as 'rich' is defined based on having an above-average income, which not everyone can have.) However, everyone having a lot of money isn't necessarily just inflation. It's entirely possible for everyone to have lots of actual goods and services (and, indeed, the standards of living having increased dramatically across the entire income distribution in the U.S. over the last several decades,) but then the standard for what is 'rich' just becomes a higher standard of living. – reirab Apr 25 at 5:16
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    I'll add another reason. Risk Profile. My father lost half of everything he owned in 2008. To this day, he refuses to invest because he fears losing that much again. In retrospect, it may have been a poor decision as he would have already recouped the money he lost, but who's to say the market won't crash again the day after her starts investing again? Odds are that it wont, but there's still a risk that it does. – dberm22 Apr 25 at 18:49
  • Sadly, the market is up 4 fold from the bottom at which he sold. – JoeTaxpayer Apr 27 at 2:32
  • +1 due to risk. That is what made me not gamble with my money (and investments may be a safe bet, but they are still a bet. And if you have a good job, pay all bill, live frugal and have 400 euro per month surplus, do you decide to use that on a bet or do you consider saving for a car?) – Hennes May 3 at 18:22

The non-rich are sensitive to recessions.

If every non-rich person followed your plan, spending would plummet. Plummeting spending causes corporation balance sheets to look bad. They cut spending, which involves mass layoffs. Mass layoffs lead to non-rich having less money to invest and force them to spend their investments.

This causes spending to go up, profits to recover. Meanwhile, the non-rich are now worse off than they were before, and the people who weathered the recession are better off due to recovered stock prices.

Our economy is structured to ensure that there are a large number of people desperate for work. It is true that individuals can pull themselves out of that trap through continuous luck and saving discipline; but the economy will respond to large numbers of people earning too much money, saving too much money, or getting too rich by generating relative poverty; often in the people in question, but sometimes in other people. Almost always the people punished will be the "vulnerable".

There are ways out of this, but they require both a rapid increase in productivity and a way to prevent wealth capture. Buying index funds unlikely to do both of these sufficiently.

Historically you can see these events in the various industrial revolutions of the 18th, 19th, 20th and 21st century. We are in the midst of the information (computing) industrial revolution; global trade flows have lifted billions out of absolute poverty. For mass investment to result in mass wealth, you'd need something as impressive as the microchip and Moore's law to kick off around now and cause yet another exponential boost in human productivity (there are a few candidates).

The World has a finite production capacity for goods. While this production capacity can and does grow, this is not going to increase over a period of several decades to be able to provide for the expensive lifestyles of 8 billion millionaires. The way the economy works actually requires there to be quite a few lower income people for every person with a high income. If a millionaire spends money to buy certain goods, then the work done to make those goods will typically involve a lot of low-skilled labor.

Another way to see the fundamental problem here, is to consider a hypothetical world where everyone is a millionaire. Who will then work in agriculture picking apples all day long? Who will clean the toilets in the office? Clearly, it's only possible for everyone to be a millionaire, whether through work or via smart investments, if all low skilled work has been automatized.

The rate at which low skilled work will end up getting atomized doesn't strongly depend on the way people choose to invest their money, there is natural technological development involved here which may be sped up to some degree, but it's not going to be radically changed simply be letting the World's population learn new investments tricks.

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    This is the answer I was looking for. Not everyone can live off investments. We have a limited input of work; money just determines what share of the output you get. – JollyJoker Apr 25 at 11:23
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    You have an extremely peculiar definition of "millionaire" that doesn't match the dictionary. By context, it appears to be "someone who avoids any physical labor." Or something. It's better to use words that actually mean what you are trying to say. – Wildcard Apr 26 at 1:55
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    @JollyJoker: But one can start out in life picking apples or cleaning toilets (both of which I've done, along with a number of other menial jobs), and in time reach a point where it's possible to live off investments (done that too :-)). – jamesqf Apr 26 at 17:30
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    "is to consider a hypothetical world where everyone is a millionaire. Who will then work in agriculture picking apples all day long?" Oddly enough, many farmers are millionaires... at least on paper. That doesn't mean they don't run their farm. – NPSF3000 Apr 28 at 15:18
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    I'll reiterate what other commentors have mentioned: missing from this is a temporal component. Yes, everyone could be a millionaire. The question is at what point in their life they become one. Assuming steady population growth, we could all slowly amass wealth as we aged, going from low skilled, cheap labor to high skilled, expensive labor as we aged. Inflation will probably occur if not enough elderly folks deplete their savings after retirement, but it doesn't change the fact that most people should be able to become millionaires in their lifetimes. – bvoyelr May 3 at 14:39

Passive investment can get you into a good footing but cannot make anyone really rich. In stock market, long term investments in funds would beat the inflation and give some real growth that can be utilized in other way (like a retirement income).

Now to actually be rich from stock market, you need an active investment strategy either value based or trading based; that most people cannot pull-off. In fact bulk of the dedicated day traders are no better-off than a regular person holding a regular job in terms of finances.

It is possible however, to invest in mutual funds, which are managed, and get a inflation adjusted return over a longer period. Now why does every one does not do it, well first a lot of people probably do not have the capital required to invest which will actually amount to something significant; if you can only invest 20 per month in a mutual fund, event after 30 years it may not amount to much. Second, many people find investment in stocks or equity based mutual funds inherently risky (the volatility), that has to do with their risk appetite, inherent outlook of stock market or simple lack of financial literacy. Third, there are people who believe on less volatile traditional instruments like bank deposits and bonds.

Investment finally comes down to what you inherently believe about an instrument, some believe in stock market, some in fixed income, some in commodity (gold, oil etc.) and some in real estate.

  • In reading your answer, I have realized an error with my question.. I did not define what I meant by 'rich'. And it is hard to. But in this context, I guess I really meant 'Financially Independent'. – Cloud Apr 24 at 12:24
  • Yes, it is possible to be financially independent by investing enough in mutual funds, but not everyone does it the broad reasons are above. Also you have to manage your investments. – Ironluca Apr 24 at 12:28
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    I think you want to clarify that with the active investment strategy the average Joe with an average starting income earns on average less than with the mutual fund but Joe can take large risks of losses to obtain a small chance of becoming very rich. – HRSE Apr 24 at 13:25
  • @Cloud. Wouldn't investing heavily into the stock market make your less financially independent? It might pay off 20 or 30 years down the road, but until then you are probably one accident away from being homeless. Assuming you don't take money back out which defeats the purpose and utility. – Tyler S. Loeper Apr 24 at 19:32
  • I don't really agree with this answer unless you have unusual definitions of "rich". $1 million is completely achievable with passive investment. If you don't call that rich then yeah, but I imagine for most people $1 million is sufficient to be rich. – Allure Apr 24 at 22:06

To add to Leon's answer, you need several things to "get rich" even with the wonders of the stock market in your favour:

  • Financial literacy. If you aren't aware of how compound interest works or how you can tack the market, you can't even start to get rich in the first place.
  • Starting capital. You don't need much to get started, but you do need something. If your circumstances are so poor that saving $50 a month is not possible, you can't get rich.
  • Discipline. This is arguably the biggest hurdle. You need to actually be disciplined enough to save that $50 / month, preferably more. Because of the way exponential growth works, you need to start saving as soon as possible (i.e. right from the first job), which for most people also coincides with the time when they're making comparatively little money. Think back to your first job and your first paycheck, your current one. How much of your paycheck do you save? Let's say the minimum expenses a month is $1000. If your first job paid $1500 / month and you saved $500, and your current job pays $3000 / month and you save $2000, you will get rich. But very few people can do this. It's a basic tenet of economic theory that the more you pay people, the more they will spend.
  • Discipline #2. You also need to be disciplined enough to ignore fluctuations in the stock market and keep putting in money even during a crash. Over 10 years, the stock market almost always goes up, but over one year, you can lose 20%, 30%, or even 50% of your money. You have to be disciplined enough to not only not sell, but also keep buying. This is psychologically difficult (see loss aversion).

Finally there are a couple more points that affect even the financially literate. These are comparatively less important, because financially literate people will be able to work around this, but they can interrupt the "getting rich" process.

  • One-time spending. The biggest example of this is buying a house. Houses are expensive, so if you decide to buy one you might have to pull some / all money out of the stock market. This interrupts the exponential growth process. Another example is illness. If you or a loved one are unfortunate enough to fall sick during a market crash, all the work you've done for 10+ years could be wiped out.
  • Humbleness. This is a bit more subtle. Once people get financially literate they also tend to be confident that they can choose stocks better than the average person (more commonly called "beat the market"). This is doable, but takes a lot of effort that most people are not willing to put in. It's psychologically difficult to just tack the market and therefore accept average returns. Once you do not tack the market, you can potentially start losing money (however usually you will continue to make money, just less than market returns).
  • Interestingly, buying a house (as opposed to renting) seems to be an important factor/indicator in accumulating wealth in Germany. It is thought that the mortgage imposes discipline #1 which few of the non-house-owners seem to have, and apparently, house-owners save more already while paying back morgage. These are observations, so they don't answer causality and it is quite possible that decision to buy is correlated with existing discipline #1. (See e.g. spiegel.de/wirtschaft/service/… [in German]) – cbeleites Apr 30 at 10:38

Because of this simple equation, that for any economy, and in the medium to long term:

goods and services produced == goods and services consumed

Being 'rich' implies consuming a much greater quantity of goods and services than one produces. Consequently in order for some people to do this, others must be poor (and consume much less than they produce).

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    "Being 'rich' implies consuming a much greater quantity of goods and services than one produces. " Source needed. Merriam Webster defines rich as "having abundant possessions and especially material wealth". One could obtain abundant possessions/wealth by producing more than they consume... the exact opposite of your logic! – NPSF3000 Apr 26 at 17:41
  • @NPSF3000 Exactly; there's a difference between having wealth and living a wealthy lifestyle. – David Apr 26 at 20:58
  • With further thought, it's ironic that the given definition of 'rich' is actually the definition of 'poor'. – NPSF3000 Apr 27 at 3:38

The answer is very easy:

If everyone invested in stocks, the stock prices would rise to the level where stock returns would be much less than what they are today. The power of the compound interest, often called the 8th wonder of the world, would drastically reduce.

It's basically a question of supply and demand. If the money supply to stocks somehow increases, the price of stocks (and thus their return) adjusts so that supply and demand are in balance again.

Because most people are foolish, the intelligent ones can enjoy great returns from their stock market investments. Be happy that there are not enough intelligent people for stock returns to go down!

Sometimes (during economic bubbles), lots of people start investing in stocks with usually catastrophic results. The intelligent investor can use this as an opportunity to reduce the exposure to stock market risk and realize past profits.

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    You have a good point - except that this may actually already be happening. One factor in the disproportionate rise in stock prices over the last few decades is the rise in 401(k) and IRA investments, and comparable developments in other countries. That is dangerous because all those people have to sell their stocks around the same time (when they retire), and there are not enough young people who'd buy (because we don't have enough children any more, and those we do have are burdened by student debt). – Kevin Keane May 4 at 11:44

"Rich" is a relevant term, so by default everyone cannot be "rich".

The problem is Capitalism, by definition the rich are at the top of the pyramid (bosses), using those below them (workers) to generate wealth. The wealth is channelled to those nearer the top of the pyramid while those further down gain proportionally less.

So under Capitalism it's not possible for everyone to be rich, we can all be millionaires but in that case that would be normal and "rich" would refer to billionaires etc.

  • Merriam Webster defines rich as "having abundant possessions and especially material wealth". No mention of 'relative term'. – NPSF3000 May 2 at 13:14
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    Define "abundant". – davidjwest May 2 at 13:50
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    This doesn't really add anything that wasn't already said in previous answers. – CactusCake May 2 at 14:57
  • @davidjwest 'Plentiful'. As a personal opinion, if I had enough food to feed myself and my family well indefinitely (e.g. a small farm) I would consider that rich in food. If I had shelter over my head for the same, I would consider that rich as well. – NPSF3000 May 2 at 16:20
  • If everyone were "rich", prices would rise, so you would no longer have the money to have abundant things. – davidjwest May 4 at 9:09

The only way a fund can outpace inflation is by investing in something that gives a better return.

For this to happen, someone will have to make an economically bad decision, because they are forced by circumstances or because they do not have all the information, and lose money as a result.

If everyone were to avoid that by investing in index funds instead, there'd be no other economic activity for the funds to latch onto and extract value from.

Paid employment is also a "bad decision" in this context, as you trade the long-term use of the products of your labor against short-term one-time payments.

So, index funds work because they are only affordable to those who are already wealthy.

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    This is flat-out wrong in so many ways. For a practical example, I was not wealthy when I started putting money in mutual funds, I was a fresh out of college programmer, yet the mutual fund company was happy to take my small initial investment - something like $500 IIRC. Nowadays I have about 1000 times as much with that company, most of it money other people might have spent on car payments and the like. – jamesqf Apr 24 at 16:49
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    @jamesqf, most of it is money other people have spent on car payments because they need a car to get to work. If those people hadn't spent that money in this way, your index funds (that almost certainly include car manufacturers) would not have performed that well. In the limit where nobody buys a car and rather invests the money into index funds, no cars are sold and no dividends from car manufacturers are paid to fund shareholders, so the system works only by people spending money. If investment is a wiser choice then either everyone is stupid, or some spending is forced (hint: the latter) – Simon Richter Apr 24 at 18:37
  • Agree with jamesqf and strongly disagree with this answer. It's true that in the limit that nobody buys cars and everyone invests into index funds, the system won't work; but as long as others keep buying cars you can profit off them. You don't need much money to invest in index funds either, you just need the discipline to keep putting in money. – Allure Apr 24 at 22:03
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    @Simon Richter: While people generally need a car to get to work, they don't need 7 or 8 years of payments on a brand-new gas-guzzling pickup or SUV when they're barely making ends meet. Sure, those who have plenty of money can afford extravagant vehicles. Those who don't can choose a less expensive car (or cell phone plan &c) and have money to invest. I say this as someone who has only once spent more than $4K on a car - and that was a hybrid that has more than paid for itself in gas savings. – jamesqf Apr 25 at 2:53
  • I don't think this answer makes sense, because taking risk and constraing your casflow typically yield rewards on average. So unless you would consider 'not taking as much risk as possible to get a maximum expected return' always a bad decision, I think that according to this answer even 'not locking up your money for decades for a good return' would always be a bad decision. – Dennis Jaheruddin Apr 25 at 15:37

If it is so easy (basically invest as heavily as you can in your youth to be rich into middle age and older), why doesn't everyone do this? There would be no need for pensions or any other savings or financial security that way, why even bother investing in assets like property that you have to manage when you can just have an index fund work for you?

Many great answers already (in particular, pay attention to @Rich's answer about the balance of what's consumed and what's produced), but here are a few more:

  • The "in the long run" is an average. An average means that some people will beat it, and some will underperform it. There are a few reasons why the run-of-the-mill investors will always (at least slightly) underperform the long-term average. Note that some parts of of my answer applies to the stock market in general, and some specifically to index funds.

  • Some people profit dramatically in the stock market, such as Warren Buffet. These "winners" will skew the average. The remaining "ordinary people" investors must - collectively - earn less than the total average.

  • The overall stock market, managed funds, and index funds form a complex system with a lot of feedback. In theory, funds merely invest in stocks, but in practice, funds are overall so large that their demand also influences stock prices.

  • Stocks that are part of an index historically will rise as they are added to the index, and drop as they are removed from an index. And in fact, the popularity of index funds is one of the reasons. Index funds must buy newly-added stocks (at the increased price), and must sell dropped stocks (and the deflated price). For the actual index, this is transparent. But for people who buy based on the index, this affects your result.

This is, theoretically, an advantage of managed funds: they are not required to adhere to this timing (but instead depend on the manager's guesswork, which usually isn't no better).

  • Insiders cashing out (legally). You see this happening a lot six months after an IPO: stock prices drop substantially when employees and early investors are allowed to sell their shares. It also happens with ordinary companies. This is another example of certain investors being able to achieve high returns that ordinary investors cannot hope to match.

  • As an individual investor, you have a limited amount of control over when you invest, and when you withdraw. You may be forced to retire or use your investment right at the bottom of the market. And not everybody has the luxury of contributing to a retirement account every month for 40 years straight. Life just doesn't work that way.

  • Competing demands. Many people have to pay off student loans, save for their children's college tuition, take care of ailing parents, and scrape together money for a home down payment. There may simply not be enough available to save in the first place.

  • Even if everyone had no constraints whatsoever, and unlimited intelligence, education, and beauty, it would still be impossible for everyone to become rich, since money has only a relative value, not an absolute one. If everyone had $1 trillion it would be exactly like everyone having only $1. While money can truly be created by creating valuable things, economy IS roughly a zero sum game, since if everyone poor would create a NEW $1 M by just creating NEW valuables, that would take away the "richness" of every previously existing millionaire. – rapt May 3 at 0:33
  • @rapt - A very good observation. I think that is pretty much what Rich had said earlier, but I like the way you phrased it. – Kevin Keane May 4 at 11:38
  1. 1,000 percent of nothing ... is nothing. The usual advertising b.s. about "long-term gains" doesn't get anyone rich. If you start with a >big< amount of money, you'll end up "rich". If you start with peanuts you'll end up with "10 times as many peanuts."

  2. Inflation takes away most of it. The usual advertising b.s. about "long-term gains" doesn't get anyone rich because of inflation.

  3. Humans don't live that long. Getting rich in 50 years is completely pointless - you'll be dead.

The usual advertising b.s. about "long-term gains" is just advertising b.s.

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    @Leon Also, I don't know about you, but I don't intend to be dead in 50 years :p – Cloud Apr 24 at 13:01
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    @Cloud this makes 2 of us! – Leon Apr 24 at 13:03
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    @Fattie: Even more pathetic, he started with $50k and invested $36k by monthly payments so the actual gains are a mere $100k at assumed 8% by the time the example subject is 60! still have to subtract inflation. – Daniel Apr 24 at 14:18
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    Charles, you're talking about scraping by enough money to retire. yes, as you say that is precisely what compound interest on stock market returns enables one to do: scrape by enough money to retire. the person asking the question was taken in by advertising talk about the wonders! of stock market averages and compounding - look at the question title - the OP thinks you can "get rich" from that. its just so far from reality. anyway guys enough back and fore, cheers. – Fattie Apr 24 at 16:51
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    @CharlesE.Grant consider that many people don't even start making money for the first 15 years of their lives, and many can't work in their old age. So the adult, working lifespan is age 15 to 70 max (assuming that you can even start saving that young, and can retire at 70) = 55 years. Saving from 25 onward is more likely, and even later when you consider paying off student debt, etc. Many many people won't be able to save for 50 years, – Stacey Apr 24 at 17:58

I'm going to take exception with all the existing answers, which at best can address why a specific individual isn't rich, but can't answer the question "why isn't everbody rich?"

All means of becoming rich inherently depend on only a relatively small number of people doing them successfully. In the case of your specific example (index funds), the money you're making ultimately comes from two sources:

  1. Other people making poor investments in the stock market (allowing the index fund to sell for more than a stock should be worth or buy for less than it should be worth).

  2. Growth/profits of the companies the index fund is investing in.

And here's the big spoiler: a large part of #2 depends on large numbers of people being poor.

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    Your “big spoiler” doesn’t seem obvious at all. You should expand on it instead of just claiming without any evidence. – chirlu Apr 30 at 18:28
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    @chirlu: If it's not obvious that a huge part of economic activity is based upon exploitation of poverty, I don't know what to say. Surely nearly all profit derived from interest is in this category, especially credit cards, auto loans, student loans, etc. So are activities where the pricing model only makes sense because the customers don't have access to something that costs a lot less in the long run. Less obvious are industries where most or all of the appeal of what's being sold is a claim that it's a gateway to wealth or gives the appearance of wealth. – R.. Apr 30 at 18:45
  • @R.. I think it's important to understand where your comments extend beyond objective fact and into subjective opinion. For example, student loan interest - I am personally a believer in a well-funded education system, but in countries where that does not exist, extending credit to a student could be the only way they achieve post-secondary education. By that token, the interest is compensation for the risk taken on in something that betters society. Does everyone agree? No. Are some loans bad and some loans good? Yes. But be careful about pushing people away by stating opinion as fact. – Grade 'Eh' Bacon May 3 at 16:47
  • My above claims do not depend on any value judgements. Without poverty, the business models simply would not work. Whether you think that's morally ok or not is not the point. – R.. May 3 at 17:06

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