How to Be Rich

How to Be Rich

Estimated reading time: 7 minutes 23 seconds

 

Most of the time when I write an article, I do so from a place of authority. This is the first time I’ve tackled a topic in which I do not profess a great amount of expertise. Instead, in this week’s episode of the Changing Minds podcast and in this article, I want to lean on the expertise of others.

Specifically, if you wanted to understand the keys to becoming wealthy, what would the most popular books of all time in this space recommend? What would they suggest? That’s what I set out to learn over the last couple of months.

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The Wisdom of the Rich

The very first book that was ever recommended to me on the topic of wealth was when I was a teenager. It was The Richest Man in Babylon by George S. Clason. I still remember getting a few small titbits that I continue to use to this day. The concept of compound interest and the importance of saving and investing your money from an early age was one of them. At the same time, thirty years since I picked up this book, I’m frustrated I didn’t implement more of what I learned.

The bad news is that no simple and transformational secret will instantly make you rich. The good news is that there are a lot of tried and tested principles of wealth and the same ideas come up over and over again when reading the wisdom of the rich.

So, this week let’s look at these key principles and actions. On the podcast, I’ll walk through the specific books and authors where these ideas come from. The authors include Mike Michalowicz, Robert T. Kiyosaki, George S. Clason, Morgan Housel, Benjamin Graham, Ramit Sethi, Dave Ramsey, David Bach, and more.

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Here are some essential ideas:

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1. Leverage Compound Interest

Compound interest is the interest calculated on the initial amount of money you put in a savings account and also on the accumulated interest from previous periods, which can significantly increase your wealth over the long term.

So, if you invest $1000 in an account at a 10% rate of return each year, that turns into $1100 after year one. $1210 after year two. $1321 after year three and so on until you’re left with approximately $6700 more or less by year twenty. So, instead of taking interest out, keeping your initial investment racking up interest and interest on the interest adds up fast.

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2. Pay Yourself First

This strategy involves setting aside a portion of your income for savings or investment before using any money for expenses. It prioritizes long-term financial security and growth.

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3. Live Below Your Means

This means spending less than you earn, which helps to avoid debt and save money. It’s about making conscious lifestyle choices that are responsible and longer-term.

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4. Diversify Your Investments

This is the process of spreading your money across different types of investments. It reduces risk. Diversification helps protect your investments from big market shifts in any single area.

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5. Think Long Term

Focus on long-term financial goals rather than being swayed by short-term fluctuations and trends. This approach encourages making decisions that will benefit your financial health in the future.

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6. Passive Income

Earnings derived from a rental property, limited partnership, or other businesses that leverage your expertise, for example. Passive income can provide financial security with minimal effort after the initial investment.

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7. Financial Planning and Discipline

Automating your savings and investments can help keep discipline in your financial planning. It involves setting up automatic transfers to savings or investment accounts to ensure consistent contributions. This takes things out of your hands which can help guarantee you are sticking to your plans.

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8. Emotional Discipline and the Market

This is about managing your emotional reactions to market fluctuations or your financial situation. So often our emotions can hijack our ability to think rationally. We must learn to avoid panic buying or selling. Think of it as a stoic way of managing your money.

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9. Understand Your Relationship with Money

Be aware of how your background, experiences, and values influence your financial decisions. This understanding can help you make more deliberate choices and avoid financial habits that cause your problems.

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10. Know What Being Wealthy and Rich Means to You

Defining what wealth means personally can guide your financial goals and strategies. It differentiates between merely having a high income (rich) and having substantial assets and financial freedom (wealthy).

Be clear about exactly what kind of wealth you want to have and why you want to have it. Sometimes the things you think you need money for you can get other ways. What matters is to pursue the life you want and understand what money that requires you to have and when.

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11. Continue to Learn About Wealth

The world is constantly changing as is the financial market. Stay educated as much as you can to learn about what is going on. This can help you to at least make relatively well-informed decisions.

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12. Regularly Check in and Make Adjustments According to Your Strategy

It’s important to have regular check-ins on your financial health. Set a monthly or quarterly review routine to assess how well you’re sticking to your budget, how your investments are doing, and whether your financial strategies need adjusting.

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By practicing these 12 wealth fundamentals, you’ll put yourself in the best position possible to build and accumulate wealth.

These principles have been written about for many years by many authors because they work. Like everything else, however, the real key lies in the implementation.

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BONUS GLOSSARY:

As a bonus this week, I figured I’d also translate many of the financial terms that are thrown about in a way that makes it easy for everyone to understand. If, like me, you’ve ever heard these expressions and wondered what was being referred to… this is for you:

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Financial independence and financial security are all about having enough money saved to ensure survival without continuous income. This means having a comfortable buffer that allows you to live without the need to earn more money.

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Financial freedom is the ultimate goal where you can do whatever you want financially. It’s not just about survival but having the liberty to make choices without financial constraints.

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Income is the money that flows into your pocket, whether it’s from a job, a business, or any other source. It’s essentially all the money that comes into your household.

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Expenditure is what goes out; it’s the money you spend. Keeping track of your expenditure is crucial for managing your finances effectively.

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Profit is what you calculate when you subtract your expenditures from your income. It’s the money left over after all your expenses are paid.

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Cost of goods sold are the types of expenses in your business that are directly related to the product and service that you offer. So, for example, if you are selling t-shirts then everything related to producing, marketing, and selling those t-shirts would be your cost of goods sold. The other business expenses would be what it costs to run your business without the product costs.

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Gross profit refers to the income left over after subtracting the cost of goods sold from your revenue. It’s a measure of efficiency as it shows how well you are managing the core costs of your business.

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Net profit is the amount of money left after all expenses have been deducted from the revenue. It gives a complete picture of your financial health beyond just the costs of goods sold.

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An Asset is anything you own that can potentially earn money or be sold for a profit. This could be a house, stocks, or any other valuable property.

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A Liability is any kind of debt or financial obligation that you owe to someone else. Managing liabilities is crucial to maintaining good financial health.

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Depreciation refers to the decrease in the value of an asset over time. For example, buying a car that decreases in value year by year.

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Your Net worth is calculated by subtracting your total liabilities from your total assets. It reflects your actual financial value at any point in time.

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Interest is the cost of borrowing money. It is what you pay on top of the loan amount, serving as a charge for the service of lending.

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Stocks, shares, and equities represent ownership stakes in a company. Owning these means you have a portion of a company’s assets and earnings.

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Bonds are essentially loans made to organizations or governments, where you receive interest in return for the money lent.

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Equity refers to the ownership value in a business, represented in percentage terms. For example, having 10% equity in a company means you own 10% of that company.

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Yield is the earnings generated from an investment over a particular period. It’s typically expressed as a percentage of the investment’s cost.

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An Index is a benchmark used to measure the performance of a set of financial assets. It helps investors understand market trends and compare performance.

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Mutual funds are investment programs funded by shareholders that trade in diversified holdings and are professionally managed.

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Diversification is an investment strategy that involves spreading your investments across various financial vehicles to minimize risk.

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Liquidity describes how quickly an asset can be converted into cash. High liquidity means an asset can be sold without significantly impacting its price.

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Capital gains are the profits that result from the sale of an asset at a higher price than its purchase price.

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Dividends are payments made by a corporation to its shareholders, typically from profits.

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Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.

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Deflation is the opposite of inflation, where prices decrease.

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Leverage involves using borrowed money to amplify potential returns on an investment, which also increases the potential risk.