6 Reasons Why the Rich Get Richer (this is a bit tongue in cheek)
1. The rich understand the Rule of 72, which tells you how quickly your money will double based on the interest rate.
At a 10% rate of return on your investment, you double your money every 7 years. At a 7% interest rate (the average return on a low-cost, balanced index fund of stocks and bonds), you double your money every 10 years. If you start out with little money and put $100 in an investment returning 7%, you’ll end up with $200 ten years later. If you are rich and your parents give you $50,000 to invest at 7%, you’ll end up with $100,000 ten years later without adding any additional money. The rich get richer because they understand the power of compound interest.
2. The rich value their time as well as their money.
They use their time wisely to generate even more money by hiring house cleaners, gardeners, childcare help, tutors, administrative assistants, etc. freeing up both time and mental space to generate more money, usually with businesses they own. The poor do all these tasks themselves because they can’t afford to hire help because they have a low income. The middle classes do these tasks themselves to “save” money when they might be better off delegating these tasks and focusing on generating a higher income.
3. The rich work hard to create capital that then works for them.
They know that once you have a chunk of money in the bank, you can invest it in income-producing assets such as rental property, business, or stocks and bonds. The poor spend all their income to survive. The middle classes spend their income on trying to look wealthy.
4. The more income-producing assets you have, the wealthier you become.
And the less you need to work as these assets produce a passive income stream and perpetual wealth with some management, but not the grinding, hard work that poor and middle classes endure.
5. The rich understand that you can recycle money to make more money.
As an asset increases in value, they pull out their original capital investment and then buy another income-producing asset with it. For example, if you buy a rental property for a good value, improve the property and it is now worth more, you can then release your original deposit by refinancing with the bank, and use that capital to make a deposit on another income-producing rental property. Rinse and repeat over a period of years and you’ll have a property portfolio all built on the original down payment of the first property. The hard work was getting that first deposit in place and then it gets easier and easier from there on. [Beware though of becoming over-leveraged, which is easily done with property and can turn against you in a market crash. The solution is to have plenty of cash on hand for emergency repairs and enough to weather long void periods with no tenants].
6. This recycling of money works in business as well.
Excess cash generated from your business or your career can be invested in a tax-deductible pension plan or 401K plan that creates an income stream for your future. Robert Kiyosaki calls this the velocity of money. It’s all about getting your original capital out as quickly as possible for reinvestment. Further, if you purchased business assets (e.g., a property) you can pull that money out once the business or property increases in value and use it to buy another investment. The way to speed up this process is to make sure that you bagged a bargain in the first place by buying a property that has some hidden potential or is overlooked for some reason (e.g., a distress sale due to foreclosure or divorce).
The same goes for businesses. If you see a business that is undervalued or you have a system to make that existing business more profitable, you can do the same. Fix up the business and turn them around, releasing your original capital outlay as quickly as possible to do the same again. And mind you, when I say quickly, that might be a few years. No real need to panic. It isn’t a race.
I remember reading one story in one of Kiyosaki’s books about a lovely house in a beautiful area that was well below value. When he questioned why, the realtor said it had a major problem: the well would run completely dry about once a year, leaving the home without water. He took an expert well-driller out to investigate and he figured that they could drill a new well in a better spot. He bought the property, drilled a new well, solving the problem and then resold the property for a hefty profit. I love this story because it shows how people are so easily put off by problems instead of seeing them as opportunities.
I did a similar thing on my very first home in the Catskills mountains. It was a big, old 1865 house with a sagging front porch and a laid stone foundation that was bowed out in the basement. Not to mention the fact that the current owner had the decorating taste of a turnip! I bought the house for $87,000 and sold it two years later for $187,000. I put about $20,000 on my credit cards to repair it.
After the sale, I paid off all my cards and used the remaining balance to buy a house in England with my husband. We did the same again, doing relatively minor improvements to a Georgian house in a coveted street in town and selling it at the top of the market for a handsome profit. We then took that profit to buy another bargain that didn’t look like a bargain. It was a massive three-bedroom house on nearly an acre. We converted it into a five-bedroom house by renovating the loft. Although we bought at the peak of the market, there was so much potential to develop the house, we didn’t lose money. Once again, we’ve taken the money out of the house to buy a rental property in town (recycling the original down payment).
We don’t do the repairs because, in England, it is cheaper to pay for people to do the work than in the USA where it may make sense to do it yourself. This is because in England there is limited space to build houses and there is a shortage of housing in the UK at this time, putting upward pressure on houses. In the USA there is no such shortage of housing so harder to make a clear profit on property, but many still do it and succeed. You just need to take your time and get to know the market so that you will know what a bargain is before you buy.
Only fools rush in. There have been long flat spells where property is flat or even declining such as during the Financial Crisis. This is why you need positive cash flows as well as some cash on hand to make sure you can weather the worst of times without losing your house, let alone your shirt!
Some people say that it is too much work to fix up a property. However, since my husband and I don’t do the hard, manual labor it is actually really fun, and I like seeing the transformation. I enjoy buying furniture, so this gives me a fun hobby in my spare time. I’m a maximizer of potential both in coaching people and in developing property and can see beyond the surface to what is truly possible.
I don’t think it requires much skill to do property improvements and just about anyone can learn to do it well. (Coaching, however, does require some special abilities to do well). Start small and slowly and make sure you have your two year’s cash reserve in place first—no need to take unnecessary risks! I’d say working in a job for 40 years and punching the clock is much harder work unless you really love your job.
If this seems too complicated, you can also get rich by being a better saver… 11 Tips for Painless Saving