Have you seen how the rich get richer and the poor get poorer? It is said that this is because of the Matthew Effect. The wealthy can capitalize their success and privileges to become more affluent. It is said that those who strategically leverage the Matthew Effect become dramatically wealthier as well as more powerful. Now, what is this effect?
Robert Merton, a sociologist, coined the term Matthew Effect. It refers to a verse in the biblical Gospel of Matthew.
A verse in the New Testament reads, “For unto every one that hath shall be given, and he shall have abundance: but from him, that hath not shall be taken away even that which he hath,”. This translates to, “Those who are successful are most likely to be given the special opportunities that lead to further success, and those who are not successful are most likely to be deprived of them.”In other words: the rich get richer.
The relevance
The Matthew Effect is relevant to many fields and aspects of life. For instance, an individual from a wealthy household will have access to quality educational institutions, will be well-nourished, have better job prospects and good networking which can be leveraged for opportunities. These privileges play a significant role in ensuring that the individual has a higher chance of prosperity.
In comparison, a person from a less than well-to-do household will not have access to all these privileges and will have to work harder to escape the vicious circle of poverty and reach a better level in society. This leads to differentiation by service providers, manufacturers and all others who need affluent customers.
For instance, financial institutions are well aware of the Matthew Effect. This is evident from the fact that they offer different risk premiums based on income. The rich can negotiate and get better rates. The poor usually require money for basic needs and are likely to borrow from financial institutions. Their desperation leads them to willingly pay high-interest rates.
Also read: The contrast effect and how it affects your investment decisions
Know how the rich get richer
Because of their affluence, the wealthy get many more moneymaking prospects compared to the poor. For instance, products such as Portfolio Management Services (PMS) & AIFs give comparatively higher returns than mutual funds. However, with the minimum investment being Rs. 50 lakhs and 1 Crore respectively, only the rich can afford to invest in them. Moreover, these moneymaking opportunities tend to be on preferential terms.
However, you need to note that there is a dramatic difference between the levels of wealth among the rich who actively leverage the Matthew Effect and those who don’t. The financial and social status of the rich who leverage the effect is much greater than those who don’t.
Those who leverage the Matthew Effect have a strong desire to become substantially wealthier. Their desire gives them the motivation to make more wealth. They have an agenda for making more money. They either have a plan or get the help of a financial planner who can guide them on managing and making more money.
The wealthy research on their own on the people from whom they can get guidance. It is not about just knowing who can be useful, but it is all about being clear on the qualities the people need to have for the wealthy to become wealthier.
It’s important to recognize that leveraging the Matthew Effect is a skill set that can be developed. While conceptually it is easy to understand, effectively leveraging the Matthew Effect has to be learned. Here’s how the rich get richer and what you can learn from them.
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How to leverage the Matthew Effect?
Tune your mind
One of the greatest ways of leveraging this effect is leveraging your ‘mind’. Successful investors think differently when compared to the average person.What stops many people from becoming successful investors is not what they know or don’t know. It’s what they think they know. Their knowledge is often limited.
The wealthy may not know everything about investing. They recognize this lack of knowledge and seek financial experts or a wealth manager to help them invest their money in the right financial products. They are often willing to take higher risks if the returns might be more. So, they tend to choose more sophisticated investments.
If you want to become truly wealthy you need to open your mind to new investment ideas or take the help of a financial expert. Author Robert Kiyosaki in Rich Dad Poor Dad says that a cynic’s reality does not let anything new in, while a fool’s reality cannot keep foolish ideas out.So,avoid being either of these.Teach your mind to be wise. This will help you become wealthier.
Also read: The Butterfly Effect And Personal Finance
Spend less
Another side of the Matthew Effect is that rich people earn more and also need to spend less. This is because of all the perks and privileges that they get. For instance, rich people who have premium credit cards get free airport lounge access where they get free food and can use all the facilities at the lounge. Someone who has an ordinary credit card might have to pay more than Rs. 1,000 for the meal at the airport lounge or even for using the airport lounge facilities. You can try and get these benefits too.
See how you can save money. There are credit cards that provide discounts at grocery stores, movie theaters, retail merchants and other places. You can even get a fuel surcharge waiver for filling fuel and lifetime discounts at your favorite hangouts. If you want to save money while you are investing, choose financial planners who work on a zero-commission basis. Fin Techs like mymoneysage offer zero-commission mutual fund plans which can save costs and enhance your returns.
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Keep track of money
The most important thing that the rich do is keeping track of where their money is going. By leveraging the Matthew Effect, the more they keep track, the more money they manage to save and invest. You could use an app to track your income and spends.
You need to keep track of your investments too. That’s how you can find out if your investments are under performing or whether your portfolio needs to be tweaked. By choosing an online portal that helps you keep track of all your investments in one place, you can save a lot of time and effort. For instance, mymoneysage helps you link all your accounts including your family accounts and see your net worth. The more you can see where your money is, the better you can manage your money.
This is how the rich get richer – By leveraging the Matthew Effect! If you think you can’t leverage the Matthew Effect, just take the help of a financial expert who can enhance your portfolio returns in the long run.