How the Rich Get RICHER | Investing for Beginners
The rich have a unique way of seeing money and it is by investing in assets. You must reprogram your brain to conceptualize the power of investing in assets and the true cost of luxuries and liabilities. Don’t get sucked into the rat race by making somebody else rich!
Jeff Bezos measures his wealth in billions. You measure your wealth in packs of ramen. And you’re sick of it, you’re ready to start building wealth, and this is the beginning. Let’s pull back the veil and gain a new perspective on money through the eyes of the rich.
The first step to accomplishing any goal is knowing what tools you can use and how those tools work. When it comes to building wealth, the rich understand that money is the most fundamental tool. If your goal is to build wealth, you must start with understanding money.
Rich people see every dollar as a worker. A dollar can work for you or against you, depending on where you place it.
To keep things simple, we will divide dollars spent into four categories: (1) necessities versus luxuries, and (2) assets versus liabilities.
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Let’s get into it!
Necessities vs. Luxuries
The necessities versus luxuries category is pretty straightforward.
It’s easy to tell the difference, but the hard part is discipline. In the beginning, you are your only asset, and the dollars you spend on food, shelter, transportation, and communication will absolutely make you more productive.
But spending the extra money to upgrade your phone every year or eating sushi for every meal will not.
Many poor and middle-class individuals get caught in a cycle known as the rat race. This is where you spend all of your extra money on luxuries and liabilities which we’ll talk about shortly.
As you make more money, letting your luxuries and liabilities inflate with your income will keep you trapped in the rat race indefinitely.
According to Robert Kiyosaki, author of Rich Dad Poor Dad, the middle class and the poor revolve around a pattern. The pattern of getting up, going to work, paying bills. This cycle repeats over and over again, and this is what he refers to as the rat race.
I’m not saying that rich people do not live a life of luxury. I’m saying the more you spend, the slower your wealth will grow or possibly not grow at all. However, once you reach a certain threshold of wealth, increasing it stops being the highest priority.
I know you already know this, so let me give you a new way to see the true cost of luxuries when your goal is to increase your wealth.
Another key concept that the rich understand and use to evaluate spending is opportunity cost.
Opportunity cost refers to the potential profit you missed out on had you made a different choice.
Skipping work to go to Disneyland not only costs you the price of the ticket but also the profit from a whole day of work. The missed profit from work is the opportunity cost.
Similarly, spending $100 on a luxury today costs you way more than $100 in the future. For instance, investing $100 in the stock market for 30 years would likely return more than $1,500.
Personally, I have a way easier time staying disciplined with my spending when I weigh the enjoyment of $100 today against $1,500 in the future.
Assets vs. Liabilities
The assets versus liabilities category is where things get a little more interesting.
Robert Kiyosaki says: assets put money in your pocket whether you work or not, and liabilities take money from your pocket.
An asset is anything that returns value to the owner. Simply put, you want your money to make more money
— Brian Glass
For most people, real estate comes to mind as an example of an asset. It is easy to conceptualize.
You buy a house, rent it out, and the renter pays you money every month. Additionally, real estate tends to increase in value over time, so you make more money if you ever sell the property.
Another common example is investing in the stock market.
The stock market consists of publicly traded companies like Amazon, JP Morgan, and Disney. You can buy a small percentage of these companies in the form of shares.
There are 2 primary ways that you can profit from owning a percentage of a company, which is analogous to owning real estate: value appreciation and dividend payments.
If the value of the company increases as they do more and more business, you can sell the shares that you bought to someone else for a higher price. The dividend payment that you receive from a share of a company is analogous to the rent payment you receive when owning real estate.
Some companies choose to pay out a portion of their profits to shareholders every few months in the form of a dividend. The greater the percentage of the company you own, the more you get paid.
As I mentioned earlier, you are also an asset.
Investing in your education, skills, or resources is another way you can put your money into assets. In most cases, the fastest way to increase your wealth early on is by investing in yourself or your own business.
There’s a lot of room for creativity here and there’s really no end to the list of potential assets you could go after. The rich look for every opportunity to use their money to acquire assets. In this way, every dollar is like a worker that is creating value.
Liabilities, however, act in the opposite way.
Dollars spent on liabilities continue to drain money from the buyer long after the initial purchase
— Brian Glass
For instance, buying a boat purely for enjoyment, sadly, is a liability.
After dropping a lump sum for the down payment, you will spend money every month to pay off the remaining balance with interest. That interest payment is essentially a negative return on your boat investments.
You will spend money every month on gas when you use it. You’ll spend money on dock fees or storage. You’ll spend money to winterize it every year. You’ll spend on regular maintenance. And finally, when you’re ready to sell to someone else, it will have lost value due to depreciation.
But wait, there’s more. After you add up all the extra costs over the lifetime of the boat, you still have to consider the opportunity cost. On top of that, not only did you lose money on the boat, but you also lost out on the potential return from acquiring an asset in its stead.
Similarly, there are countless creative ways you can spend your money on liabilities.
The line between assets and liabilities is not always clean and consistent.
At first glance, you might consider a car to be a liability. It has many similarities to the boat: recurring payments, interest, gas, maintenance, insurance, inspections, et cetera. However, the big difference is that your car might enable you to go to work and make money.
Now, the car jumps from the liability category to the necessity category.
But if you then upgrade that car to a Lambo where your car payment starts to dwarf your income, it jumps back to the liability column.
But then if you start a business where you’re renting out your Lambo to high-profile individuals, it jumps once again into the asset category.
As you can see, there’s a lot of room for creativity. You can often find ways to transform your liabilities into assets.
Another example where the line between asset and liability can be murky is a personal story of mine.
My wife and I bought a house that we wanted to fix up. In this case, it wasn’t the money that created an opportunity cost as much as the time. We spent months renovating the kitchen, master bedroom, master bathroom, guest bath, and landscaping in the backyard.
Realistically, we will probably see some return on these improvements in the future, but that time could have been spent on our more lucrative business ventures.
Hopefully, I got you thinking about different opportunities to build wealth as well as the pitfalls of potential liabilities and opportunity costs. Until next time!
If you enjoyed this article and would like to learn more about the cheapest way to build a financial safety net that will secure your retirement, check out my comparison between Traditional 401K, Traditional IRA, and Roth IRA in retirement investing.
Until next time!
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