Why is it that rich people have their money work hard for them, but poor people work hard?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 344.1 million views in recent years.

In the answers below I focused on the following topics and issues:

  • Why is it that rich people have their money work hard for them, but poor people work hard? Or is it even true in the first place?
  • Is there a big difference between being self-employed and a business owner?
  • Why did the Venezuelan stock market fall by 99%?

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

Source for all answers – Adam Fayed’s Quora page.

Why is it that rich people have their money work hard for them, but poor people work hard?

Things have changed in the last few generations.

Long gone are the days when there is a clear separation between labor and capital in all cases.

Think about any “everyday millionaire” you have met. We all know the type. They are maybe a newly retired schoolteacher or accountant.

They are multi-millionaires due to buying stocks or property in the right location in the 1960s or some faraway decade, and they have just bought and held.

Compounding has done the hard lifting. They did it either co-incidentally or worked out a basic fact – the returns on capital beat labor long-term even if not every year or decade.

Smart investing is ranked as the third most important factor in wealth accumulation, according to many studies:

With that being said, hard work is ranked as the number one according to the above survey.

There is an obvious reason for that. Unless you have inherited money, wealthy people start out as working or middle-class.

The first $100,000, and especially $1m, was very hard. Many risks needed to be taken (ranked as number 5 above), and hard work was a part of that.

After the first $1m is acquired, getting to $2m or even $10m is much easier than the first $1m.

At this stage, “letting your money work hard for you” and awaiting obvious mistakes like falling out with business partners and getting divorced loads of times, can work wonders.

Yet making hard and taking risks can be very effective to get your foot on the first step on the ladder.

The part about taking risks is also important. Working hard tends to be most effective when it is combined with many other things.

For example, working hard in the right industry, whilst taking risks and being persistent, will more likely result in success than merely working hard.

Let’s give a simple example. If somebody is making the minimum wage, working hard will just result in more hours worked and income will be linear, at least until that person is promoted.

In comparison, a young person starting out who works hard in a results-driven industry with a low basic wage but huge bonuses if things go well is more likely to succeed in return for the higher risk.

What is the difference between a business person and a self-employed person?

Consider this question. Do most self-employed people earn money when they are sleeping?

The answer is usually no, with a few exceptions. A self-employed carpenter makes more money when they get more jobs.

The same is true for an electrician. More hours = more money. It is similar to being a salaried employee, only you have the potential to earn more, you are taking more risks and you don’t typically have paid holidays and sick days.

In comparison, a business owner is:

  • Taking on more responsibility and risks, as he/she usually hires others
  • Earning money whilst he/she sleeps – at least once the business is succeeding. That doesn’t mean that all owners are rich. It merely means that revenue can come in if you take a day off. The factory owner doesn’t earn $0 if he is ill for a week. The owner of an insurance company still sees renewal payments come in from clients regardless of how many hours are put in. Of course, working harder is more likely to increase residual income as well, but the point is, the connection between hours worked and money has been broken.
  • More likely to leverage technology and not just labor. Sure, a self-employed person can also use social media ads, but it tends to be a smaller operation.
  • In a different legal position, and has greater liabilities. In some countries, being a sole proprietor is a different legal entity from running a limited company.
  • Less likely to switch off. If you are an employee, you can usually stop thinking about work on your summer holidays, unless you are passionate about it. A self-employed person can do as well, but is more likely to think about it. Somebody who owns a business is more likely to think about work all the time, take less time off, etc.

These are generalizations, but they often hold true.

The Venezuela stock market crashed 99.90% on March 15th, 2021. What happened and why?

The economy and the stock market aren’t usually linked in developed countries.

In the case of countries which are in civil war, or facing hyperinflation, the situation is different.

Venezuela has a horrendous inflation situation:

What’s more, the political regime is radical. There is nothing stopping the government from confiscating property and capital.

Finally, we have to remember that all the firms listed on that stock market are locally focused.

There is no equivalent of a Venezuelan Starbucks or Apple – a firm that gets revenues from almost every country in the world and therefore isn’t linked to one countries economy.

Even some stock markets in the region, such as Brazil, whilst not as international as the US markets, do have firms with global revenues.

Given all of these factors, why would anybody want to keep their money in local stocks, the local currency or indeed the real estate?

Almost every local with any money left wants to move it overseas, which is why the government bought in restrictions on capital.

It gives us a great lesson in not putting all your eggs in one basket, and not focusing on stock markets in radical regimes which have localized stocks.

Far better to focus on markets that are more diversified. The US S&P500 can do well even if the US isn’t performing well.

The same is true for the FTSE All-Stars in the UK and many other stock markets.

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Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 440.2 million answers views on Quora.com and a widely sold book on Amazon

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