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“Money attracts money”.
In my youth, my mom shared the idea with me, explaining how she could earn 4% annually by investing £3000 for three years.
Even in the Bible it states, “For to everyone who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.” (Matthew, 25:29).
This is from the parable of the Talents. A master entrusts different amounts of talents (currency) to his servants. Two servants invest and double their talents, while one hides his and faces consequences. The parable conveys the message of responsibility and fruitful use of God-given gifts. It also can reveal how wealth can mysteriously attract greater wealth at a faster rate.
We call this effect the Matthew effect; those who have an abundance of something will accumulate more. In this blog, I will investigate this dynamic further and uncover the truth behind the saying.
A basic explanation:
The Matthew Effect describes a phenomenon where initial advantages lead to further success, while initial disadvantages make improvement more challenging. Advantages, whether financial or educational, create a positive feedback loop. This provides more opportunities and resources, which fosters confidence and a positive mindset. Potentially, this leads to continued success. Addressing inequality often requires intentional interventions to level the playing field. Understanding the Matthew Effect informs discussions about social justice and the importance of equal access to opportunities.
Certainly, in my own life, I have regarded it as my duty to grow my wealth, and I’m sure that hearing the parable of the talents at a young age has affected my beliefs about money positively.
Mathematical Realities of Compound Growth
Charlie Munger has stated himself, in his typical Mungerist way, that everyone should aim to make their first £100,000 as soon as possible:
“I don’t care what you have to do — if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.”
Charlie Munger
What he is referring to here is the mathematical reality of compounding growth. The more money you have, the more it compounds over time. Let’s imagine a situation where someone invests £10,000 at 8%.
You can look at the graph I’ve plotted below:
It’s great that you will have doubled that £10,000, but it’s still a small amount of money.
However, if you were to change the initial amount to £100,000, the growth trajectory is the same, but the final amount is decidedly more impressive.
As we increase more time into the equation, the result becomes more pronounced, and after 30 years, you would have a million. If you were to do the same with £10,000, in 30 years you would hit £100,000.
If you have £100,000 therefore, you can easily make it to the million mark in 30 years – less time if you have a higher growth rate. However, small amounts of money, whilst just as easy to compound, takes a long time to reach an impressive amount.
Creating an effective budget is a critical component of amassing your first £100,000, so don’t just think it’s about earning your way there.
Access to Opportunities
I also believe that having a lot of money in the first place can allow you to gain access to some opportunities which are not open to those with a lower net worth.
For instance, if you have £10,000, you would have limited access to property as an investment. You may be able to buy one small investment property in an area where property is cheaper and with less opportunity for capital appreciation.
These properties will likely be distressed (damaged), or in undesirable areas. Tenants are also likely to be more problematic, as they will probably be on low income or benefits.
Note: Some low-income tenants can be reliable, but they may face challenges in paying rent.
With £100,000, you can explore more property options, possibly buying multiple properties. Areas with strong growth and good tenants may lead to increased profits, capital gains, and opportunities for future investments through remortgaging.
With a larger amount of money, you could even buy a distressed property and then use your cash reserve to improve the property’s condition, resuting in an instant profit when you remortgage (as long as you don’t overspend on the refurb).
Money and Mindset
This mathematical understanding of the compounding effect is something that anyone can understand with practice, but is something deeper, or spiritual implied by the phrase, “money attracts money”?
Does having money actually affect us in deep ways that can help us develop a better money mindset?
At a basic level, it has been shown that having money can increase happiness and life satisfaction. The effect seems to be linked to money increasing both our overall self-esteem and our social status. There is, however, a plateauing effect which occurs when our income reaches around $100,000 annually.
I think that this relationship is probably something that varies according to the individual and their personality. Nevertheless, it probably is true that there is a “happiness curve”, which levels out once someone has hit an almost arbitrary amount of income. This amount of income seems to depend on the country, social circles, personality factors and so on, so here is a graph to show the basic relationship.
The Law of Attraction
Some people take this idea of money attracting money into a spiritual realm. The law of attraction is a philosophical concept which expresses the idea that our thoughts and feelings influence our ability to attract abundance into our lives. Certain books such as the Secret Law of Attraction, aim to provide readers with techniques which build this positive mindset.
The 3 Principles of the Law of Attraction
The Law of Attraction is a philosophical concept that suggests our thoughts and feelings influence our ability to attract abundance into our lives. While interpretations may vary, three core principles are often associated with the Law of Attraction:
- Positive Thinking: Emphasising the power of positive thoughts, the Law of Attraction encourages maintaining an optimistic outlook. Advocates believe that focusing on positive aspects attracts positive outcomes. This principle underscores the importance of cultivating a mindset that aligns with desired goals and outcomes.
- Visualisation: Visualisation involves creating mental images of desired outcomes. According to the Law of Attraction, vividly imagining success or achieving goals helps align the subconscious mind with one’s aspirations. By visualising positive scenarios, individuals aim to manifest those circ*mstances in reality, influencing their actions and decisions.
- Manifestation through Belief: Central to the Law of Attraction is the idea that sincere belief in the attainability of goals enhances the likelihood of manifestation. The principle suggests that cultivating a deep-seated belief in the feasibility of one’s desires sends a powerful message to the universe, prompting it to align circ*mstances in favour of those beliefs.
Why the Law of Attraction is a Fishy Concept
I believe that the law of attraction is one of the strangest beliefs which is both true and completely impossible to prove at the same time. The immense power of the mind is something that is evident when we take placebos. Placebo pills taken by cancer patients in a randomised study actually resulted in them improving their condition and experiencing less fatigue.
Our body seems to respond positively to certain changes in our state of mind.
This mind-body connection seems to be the source of this belief in the law of attraction. However, there does not seem to be a way of justifying the spiritual link between having positive thoughts and the positive results that we can achieve. This means that a book which is filled with spiritual mumbo-jumbo, may “work”, despite it being factually incorrect.
For instance, Napoleon Hill’s Think and Grow Rich, contains a lot of seemingly random ideas and ungrounded statements. On reading it, I thought it really expressed nonsense. I did, however, feel more confident in myself after reading it.
I think we can still remain skeptical about the spiritual link between our thoughts and the results that we achieve in life. However, there does seem to be at least some evidence that positive thoughts can have positive effects on our life outcomes.
Money as Proof of Competence?
Having money is a tangible way in which we can justify to ourselves that we are capable. It can give us proof that we have expertise in a certain area. This expertise is also picked up by women, who tend to be hypergamous in their pursuit of partners.
This confidence can lead us to take more calculated risks to make more money and to take advantage of other opportunities. Although there is probably significant variance amongst individuals, there is scientific evidence that links millionaire status to increased appetite towards risk.
Some Real-Life Examples of the Matthew’s Effect
Just to provide a little more context on this idea of life advantages leading to greater success, here are some real-life examples of the Matthew’s effect in practice. These examples also demonstrate that it is not just money that attracts money.
So-called Unfair Advantages can also lead to greater success:
- Bill Gates:
- Initial Advantage: Gates had access to a computer at a time when they were rare. This sparked his early interest in programming.
- Matthew Effect: His early exposure and skills led to the creation of Microsoft. As Microsoft gained success, Gates became one of the wealthiest individuals globally. This allowed him to invest in various ventures and philanthropic efforts.
- Warren Buffett:
- Initial Advantage: Buffett began investing at a young age. He had access to valuable investing insights from his father and mentors.
- Matthew Effect: His early success in the stock market allowed him to accumulate substantial wealth. With Berkshire Hathaway, he continued to make successful investments, compounding his wealth over time.
- Mark Zuckerberg:
- Initial Advantage: Zuckerberg had early exposure to computers and programming and he attended Harvard. Here he had access to resources and a conducive environment for innovation.
- Matthew Effect: The success of Facebook propelled Zuckerberg into the ranks of billionaires. His financial resources and influence allowed him to acquire and invest in other companies, expanding his impact on the tech industry.
- Oprah Winfrey:
- Initial Advantage: Oprah’s talent as a news anchor and talk show host garnered her attention and opportunities in the media industry.
- Matthew Effect: The success of “The Oprah Winfrey Show” turned her into a media mogul. Her influence and wealth provided her with the means to launch her production company. She could then invest in various ventures.
- Elon Musk:
- Initial Advantage: Musk co-founded Zip2, which was sold for a substantial amount, providing him with capital for his future ventures.
- Matthew Effect: The profits from Zip2 and subsequent ventures like PayPal, Tesla, and SpaceX contributed to Musk’s increasing influence and financial capabilities, allowing him to pursue ambitious projects.
These examples showcase how early advantages or successes set individuals on a trajectory that leads to further opportunities, wealth accumulation, and influence.
The Matthew Effect is evident in their stories, where initial accomplishments played a pivotal role in shaping their long-term success.
Summary
We’ve learned that initial advantages set the stage for more success over time. Think of it as a snowball effect—getting bigger as it rolls.
The mathematical reality of compounding growth can propel people towards riches over time. There are, however, other psychological reasons why money can attract money.
Understanding the link between money and mindset, we see that having money can boost confidence and encourage taking smart risks. Real-life examples prove that early advantages open doors to more opportunities. This trend is not just evident in money but in various aspects of life.
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