The Matthew Effect

There is a parable in the biblical Gospel of Matthew at chapter 13:12: “For whosoever has, to him shall be given, and he shall have more abundance: but whosoever has not, from him shall be taken away even that he has.” (Translate in Mandarin : “凡 有 的 ， 还 要 加 给 他 ， 叫 他 有 馀 ； 凡 没 有 的 ， 连 他 所 有 的 ， 也 要 夺 去 。”). It was a sociologist, Robert King Merton who identified the phenomenon of “The rich get richer and the poor get poorer” and linked it with the abovementioned phrase.

When we consider now basing on the past, we will find out that God seems has permeated this effect every corner of the societies. It is getting even more prominent at the wealth distribution process. How could this happen? It is because either we are poor or rich, we need to fulfill four basic necessities, i.e. clothing, food, shelter and transportation. For most of the people at the middle class like us, these 4 basic necessities could have occupied most of our salaries, sometimes even up to 80% to 90%. Even though our salary will increase after certain period, but inflation and a list of expenses such as insurance, house and car mortgage payment and maintenance fees will still plague us along our daily life. We are just stuck in the rat race.

According to the book “The Millionaire Next Door” that I read few years ago, rich men only spend 1% to 5% at the necessities, and will have 95% to 99% of disposal income for either spending on luxury items and investing. By getting the right investment, the richer will be growing their wealth exponentially. Moreover, the richer will be able to access to greater credit to leverage their business and investment. In fact, what the poorer put into the bank are being utilised by the richer to grow their wealth.

I want to emphasise that savings and the power of compounding effect will be the ultimate way of breaking the circle of poverty. Savings will allow us to accumulate capital of which subsequently we need to use this capital to work our way out of the rat race. I will talk more about compounding effect in the next few threads.