How to manage your money like the rich…

Wealthy people invest first & spend what’s left…

Broke people spend first & invest what’s left

– Unknown –

People have this misconception about wealth.  It’s common belief that building wealth is about how much money you make, but the truth is, it’s not about how much you make, but what you do with it from that point on.

There are many high income earners that make a six figure income but yet still live check to check.  So once again, don’t buy into the misconception that it’s about how much you make that matters.

If you truly want to build a wealth portfolio and watch it grow, then it’s imperative that you start taking on the mindset of those who have been successful already and follow the path in doing so. 

I’m not a financial advisor so I’m not going to tell you what you should invest in, but I am someone who is in the process of building wealth from scratch while taking lessons from the wealthy and putting them into practice.  As someone who’s taking the journey with me, you might want to consider doing the same.

At this stage in my wealth building adventure, I’m doing it at a micro level while I continue to pay down debt. However, I’m still able to follow the same principles that the wealthy use. The first place to start is taking on the mindset of the rich.

A key mindset difference between the wealthy and the poor is the abundance mentality vs the scarcity mentality. Here’s a couple examples of what I mean:

Scarcity mentality: “I want to be debt free”

Abundant mentality: “I want to be financially free”

Scarcity mentality: “I need to live below my means”

Abundant mentality: “I need to expand my means”

As you can see, the scarcity mentality exist within a place of confinement. Reducing expenses and living within a limited income and borrowing money to purchase things they can’t afford. Even if they are debt free, they are not financially free because they have to work to earn income. Let me reiterate… debt free does not equate to being financially free. Whereas the abundant mentality exist within a place of limitless opportunity by creating multiple streams of income and having those multiple streams of income fund their lifestyle.

See, the rich acquire assets. Assets are things that put money into your account. The rich focus on passive investments because they are assets that accrue wealth without actually having to physically work for it. These assets continue to work for them and make money even while they sleep. A few examples are:

  • Owning businesses that don’t require their presence
  • Dividend paying and growth stocks
  • Bonds
  • Notes
  • Royalties
  • Income generating real estate

Another difference between the wealthy and the poor is that wealthy people view money as a tool and nothing more. Money is merely a means to an end and not the end itself. The tool of money is the means to financial freedom which is the end goal.

If you’ve watched the video “The richest man in babylon” (hint… hint) that I have linked in the side bar to the right, then you probably understand that the rich follow the mantra “a portion of what I earn is mine to keep”. In other words, they pay themselves first and put that money to work for them which in turns creates more money to reinvest. It’s a perpetual cycle.

One example of this is reinvesting the dividends of dividend paying stocks into the purchase of more dividend paying stocks. The acronym for this is “DRIP” or dividend reinvestment program. Instead of spending the dividends paid out by the corporations, the wealthy reinvest those dividends to purchase more of the dividend paying stock so that when the next dividend payout occurs, they have more income to reinvest into purchasing more shares of dividend paying stocks. Do you see the pattern of having money work for you to earn yet more money to work for you over and over again?

Another difference between the wealthy and the poor is that the rich don’t keep a lot of money in the bank. Sure, they keep enough saved in an emergency fund account and some “dry powder” in an investment account for when buying opportunities occur, but the rest of what they earn is put to work for them. Poor people however, keep money in the bank earning very little interest while sitting in a savings account, often just fractions of a percent. Meanwhile the bank loans out that saved money at a higher interest rate and keeps the difference for itself. Notice how the banks are making money?

That leads me to the next distinguished habit of the rich. They legally use other peoples money to make them money. The rich use leverage in their favor. They borrow money to purchase an income generating asset like real estate and keep the difference between what income the asset generates and what the loan payment is. This is called cash flow positive for those not yet well versed in financial terminology. This cash flow is then wisely put back to work to purchase more income producing assets.

Another investment of the rich is the purchase of things that grow in value over time. Rare art and/or artifacts are good examples. But one of the main assets they purchase are growth stocks. Growth stocks are companies like Amazon, Facebook, Google and Apple just to name a few. Growth stocks can be riskier investments due to the fact that they can lose value, but risk management by doing due diligence before investing in them can be mitigated.

I hope you’re seeing the pattern… investing in assets that work for you so that you can then purchase more assets with the income your already existing assets create. That and one more thing that I will share with you about the mentality of the rich.

I saved the best for last. The rich understand the genius of compounded interest over time. It’s the snow ball affect of perpetually reinvesting income and interest generated by existing income that grows massively over time. It’s the “long game” mentality by delaying gratification now to reap the rewards later.

The journey of wealth building is a long slow one. The “get rich quick” mentality is for gamblers, not investors. Is it possible to get rich quick? Sure, but it’s not easy and it requires high risk to reward variables to achieve. Think about it, if getting rich quick was really so easy to do, wouldn’t everyone be doing it? Don’t let yourself fall for that trap… it’s those selling get rich quick methods that are getting rick quick by poor mentality individuals chasing the dream.

As I like to say… “the journey begins with the first step”.

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I’ll see you in the next post. Until next time… be sure to comment below and let’s get some dialogue going. I’m curious to know, what tips do you have on how to manage your money like the rich?

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