How the rich get richer and you can, too

By Mitch Tuchman

We all know, innately, how the rich get richer. Money begets money. But how does that actually happen, aside from compounding interest and purely financial factors?

You could take the cynic's view that the game is rigged. But the more accurate answer, backed by research, is that the rich get richer because of great parenting. How rich you become over your lifetime is directly related to how early you capture the basic truths of finance and investing.

You have seen the exception that proves the rule, the rich kid who blows his family's wealth in a generation through poor decisions. Chalk that up to absentee parents. Truly, teaching is the missing link.

According to a report in Time magazine :

In a paper unveiled a few months ago, researchers led by Annamaria Lusardi, professor of economics at George Washington University, found that an early understanding of financial concepts accounts for as much as half of the wealth gap between the affluent and those with low incomes . Lusardi also found an exponential effect: Those who acquire financial understanding early tend to accumulate assets faster and those with more assets tend to keep learning about personal finance because they have more at stake. (Emphasis added)

There are two powerful forces at work here, in terms of how the rich get richer. Let's tease them out so that you can benefit from the knowledge.

First and foremost, how the rich get richer has a lot to do with picking the right parents. Kidding aside, being born into a developed-country household, availing yourself of a quality education at a low relative cost, enjoying the benefits of a healthy diet and a safe childhood, all of these things give a person automatic advantages.

Yet there are people born into good circumstances who nevertheless seem to just "get by." They see the rich get richer and, quite rightly, question their own choices.

Instead, they should question, or at least examine, their parents' choices. Kids don't listen to what their parents say. They do what their parents do. A parent who saves diligently and consumes moderately is setting a very good, lifelong example for his or her children. A parent who constantly overspends and lives in debt does not.

How the rich get richer: They start early

But the kicker here is learning by doing: Teaching by example is great, but a child learns the power of saving and investing not only by seeing it done by others but by doing it themselves. Practice is how the rich get richer.

Once a young person gets a little bit of capital set aside, they begin to think more conservatively about money: How can I protect and grow that wealth? What are the risks to my plan?

How the rich get richer is by passing on simple lessons about compound interest, about risk and reward, and about the role of money in a healthy, happy life. Rich parents don't fear money; they consider it a useful tool. Those attitudes pass on, compounding in value with each succeeding generation.

Working hard at getting an education is a great base. The simple act of periodic, automatic saving is another excellent lesson. Prudent, effective investing is yet another.

Great fortunes are often built not on chance events but on steady, risk-controlled investment plans that take into account the best practices of generations . 

http://www.marketwatch.com/story/how-the-rich-get-richer-and-you-can-too-2012-10-03

Napoleon Hill - Think And Grow Rich - ORIGINAL Full Length

The Rich Get Richer!

Asians value education.  However, education alone does not create wealth.  It is what one does with all the knowledge that is key to getting rich.

Have you ever wondered why the rich get richer?  

By virtue of their wealth, they are able to take advantage of two components:

• time and
• risk.

They are able to set aside money at an early age and watch their savings grow through compounding over time.  The other component is risk.  If you have time on your side, you can afford to take on more risk and invest in instruments that can give you better returns.  The end result is achieving exponential returns on your savings.

The 3 ways to riches are:

• Born Rich
• Rich Professionals
• From Rags to Riches - Entrepreneurs

With time on their side, the rich can afford to take more risk and invest for higher returns.  This means that they would have the "holding power" to ride through any short-term losses.  

In the world of finance and investment, time is really money because money has a time value.  As an economic resource, money is capable of earning a  rate of return which we call interest.  With the compounding effect, your money can really grow exponentially over time.

The Next Level

With sufficient seed money, you get to invest in property, which is one of the favourite investment vehicles for the rich.  Through leveraged investing in property, returns can double or triple in the short term.  In fact, nearly everyone who has invested in property leverages.  For example, an investment of $100,000 can be leveraged 10 X , via a loan, to buy a $1 million property.  A 20% appreciation on the property would be equivalent to $200,000, representing a 200% gain on the initial capital invested.

Other than property, you may be wondering if the rates of return of 10%, 15% or 20% are realistic and possible.  The answer is a resounding 'yes' but you will need to take the risk with a multi-asset portfolio that can invest in equities, bonds, futures, etc.  It must be able to adopt alternative strategies, like investing short and using leverage, to capitalize on market conditions that are constantly changing.  In brief, you will need to include non-traditional investments to your portfolio.

The point is that investment is a continuous process.  You need to keep searching for instruments that can yield returns of 10% or more.  It takes time and effort but it is not impossible.

For those who are risk-adverse and growing their money at fixed deposit rates - the likely trade-off is that they will have to settle for lower returns and thus end up with a smaller retirement nest-egg.  The value of their money will shrink over time as a result of the ravaging effect of inflation and they might just end up poor.  The rich, on the other hand, will most likely attract better opportunities to them.  They will also be able to stomach risk and diversify their assets into different businesses to multiply their wealth.

Get richer.  Understand risk, manage it well and you will be rewarded over the long term.


Ref:  How to be a successful investor by William Cai

Building Knowledge

25 Rules to Grow Rich By #11: Building Knowledge
November 27, 2006 @ 10:23 am - Written by Trent


Rule #11: If you don’t understand how an investment works, don’t buy it.

The sheer hubris of the above statement is incredible. “Leave the real money makers to the experts; you go along and play with your savings account at your local bank, junior.” It’s typical of the attitude of many people in the financial sector as they try to play Prometheus, bringing the fire of financial knowledge from the gods of Wall Street.

The fact is that most investments are not all that complicated. If you are interested in a particular investment, pick up a book at your local library (or your local bookstore) and read about it. This is an opportunity to learn something that could be directly useful to your pocketbook, not an excuse to run for the hills like a coward.

I agree that you should never buy an investment that you don’t understand, but merely saying, “I don’t understand it, so I’m not going to buy it” is a losing philosophy. You’re much better off saying, “I don’t understand it, so I’m going to learn about it.”

Let’s rewrite that rule:

Rewritten Rule #11: If you don’t understand how an investment works, do some research before you invest; don’t just write it off.

http://www.thesimpledollar.com/2006/11/27/25-rules-to-grow-rich-by-11-building-knowledge/

25 Rules to Grow Rich

Money Magazine’s 25 Rules to Grow Rich By - Reevaluated

November 13, 2006 @ 12:06 pm - Written by Trent
Categories: 25 Rules To Grow Rich By

Recently, I had the opportunity to read and reflect upon an article in Money Magazine entitled 25 Rules to Grow Rich By, a brief piece outlining 25 basic financial principles that should, in theory, bring about financial success. As a young person looking to build the foundations of a financially successful life, my first read-through of the rules made me reflect on my own lifestyle in relation to each rule. Was I following that rule? Was I really following this one?

But as I thought about them, I began to wonder how valid each rule really was. Were they actually sound financial rules, especially for someone in my shoes? Or was it just an off-the-cuff article, not really meant to be taken seriously? I began to wonder, so I began to consider them more carefully and to dig a little deeper. What I found was a lot of accuracy, but the accuracy varied depending on the audience of the article.

Over the next twenty five weekdays, I’m going to evaluate each rule in detail, discussing mostly the pros but also the cons. The perspective that I’m going to use is generally my own (with a bit of additional fact-based research), meaning that I’m looking at this list through the eyes of a twentysomething who is climbing out of debt and has (most of) a lifetime of financial choices still to be made. Which rules apply to me now? Which ones will apply in the future?

If you want to keep tabs on this series, bookmark this post. I will be using it as a table of contents for the series, adding each rule to the list below as I post it. At the end of the series, this post will tie together extensive reflections on Money Magazine’s 25 Rules to Grow Rich By.

So, let’s start wandering down the yellow brick road together, shall we?

Rule 1: For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.
Rule 2: It’s worth refinancing your mortgage when you can cut your interest rate by at least one point.
Rule 3: Spend no more than two times your income on a home. For a down payment, it’s best to come up with at least 20%.
Rule 4: Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.
Rule 5: Never hire a roofer, driveway paver or chimney sweep who is going door to door.
Rule 6: All else being equal, the best place to invest is a 401(k). Once you’ve earned the full company match, max out a Roth IRA. Still have money to invest? Put more in your 401(k) or a traditional IRA.
Rule 7: To figure out what percentage of your money should be in stocks, subtract your age from 120.
Rule 8: Invest no more than 10% of your portfolio in your company stock–or any single company’s stock, for that matter.
Rule 9: The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.
Rule 10: Aim to build a retirement nest egg that is 25 times the annual investment income you need. So if you want $40,000 a year to supplement Social Security and a pension, you must save $1 million.
Rule 11: If you don’t understand how an investment works, don’t buy it.
Rule 12: If you’re not saving 10% of your salary, you aren’t saving enough.
Rule 13: Keep three months’ worth of living expenses in a bank savings account or a money-market fund for emergencies. If you have kids or rely on one income, make it six months’.
Rule 14: Aim to accumulate enough money to pay for a third of your kids’ college costs. You can borrow the rest or cover it from your income.
Rule 15: You need enough life insurance to replace at least five years of your salary–as much as 10 years if you have several young children or significant debts.
Rule 16: When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium.
Rule 17: The best credit card is a no-fee rewards card that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.
Rule 18: The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.
Rule 19: Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit-card account is a scam artist.
Rule 20: The best way to save money on a car is to buy a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.
Rule 21: Lease a new car or truck only if you plan to replace it within two or three years.
Rule 22: Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.
Rule 23: Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.
Rule 24: Don’t redeem frequent-flier miles unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles you spend.
Rule 25: When you shop for electronics, don’t pay for an extended warranty. One exception: It’s a laptop and the warranty is from the manufacturer.

http://www.thesimpledollar.com/2006/11/13/money-magazines-25-rules-to-grow-rich-by-reevaluated/