Once you’re rich, you’re all set – right?
Well, maybe not. We’ve all seen news stories about lottery winners and pro athletes who struck it right, only to find themselves broke again a short time later. So it seems that no matter how much money you have, you’ll run out eventually.
Only that isn’t true either, because we know that plenty of rich people stay rich all their lives – and plenty of rich families stay rich for generations. Sometimes these people have a great deal more money than athletes and lottery winners, but not always: sometimes they’re just managing it properly. How are they doing it? What do rich people do with their money that makes it last so long, and can we learn to do the same?
Don’t spend it – save it
Okay, so this is an obvious tip. It’s always a good idea to save money rather than spend it. But don’t underestimate how serious many rich people are about this idea. Plenty of rich folks are also notorious cheapskates!
This isn’t to say you should be cheap and miserly, but remember that living within your means is the key to long-term wealth. Even when you see rich people spend, you’re only seeing them spend a portion of their net worth. If a person making $400,000 a year spends $400 on a single meal, that may seem absurdly extravagant – but remember that that’s the equivalent of a person earning $40,000 a year spending $40! If you cook at home instead, you’ll save money. And if you follow the rest of our tips, maybe it will be you spending $400 on a meal someday in the future – when you can afford it, thanks to the decisions you made early on.
So what do you do with the money you’ve saved? Simple: you invest it.
Rich folks stay rich (and keep growing richer) in a large part because they’re the ones investing the most money. With investment, you put money into other people’s companies – and reap the benefits of their labor.
Investment is the most important method for growing richer because it takes advantage of the most powerful tool in economics: compounding interest. If you earn $40,000 a year, you’ll have earned $80,000 in two years and $120,000 in three years. The graph of your earnings would be a straight line, going up. Pretty good!
If you invest some of that money, you can make it earn more money. And thanks to compounding interest, the graph won’t be straight anymore – it will start angling up and up, earning you more and more as time passes. It works like this: invest some amount (let’s say $100), earn interest (let’s say it’s a great year, and you make $10). If you get the same percentage of interest next year, you’ll now earn more than $10 – because instead of 10% of $100, you’ll be getting 10% of $110 (which is $11, of course). Let this work for a while and pretty soon your interest is worth a ton of money each year, all without you touching the money or lifting a finger at work.
The more you save, the more you can invest. And the more you invest (and the earlier you invest), the more you can take advantage of compound interest to grow your nest egg faster and faster as you live on. Rich folks sometimes have enough money to live off of their interest alone, meaning they can stop working and never get any less rich! That may be a goal that’s out of reach for some of us, but we can use the same principles to make the most of our own finances.
Spend wisely on luxuries
The rich don’t save and invest all of their money, of course. You’ve seen enough yachts and mansions to know that someone is buying these things.
And you’re right – but you should also know that rich people who stay rich think very carefully about these purchases, and you should, too.
Let’s say you want a boat. You have a few choices to make. Maybe you go out and buy a brand-new boat, top of the line, with all the bells and whistles. That’s your most expensive option, and it robs you of extra cash that you could otherwise invest.
Here’s another option: look for used boats for sale. Get a great model for less because it’s a couple of years old. Make sure you’re buying a boat within your budget, and wait until later in life to buy one – because, as we learned earlier, money you earn early in life has more potential value through compound interest.
A boat, by the way, is an example of a luxury that loses value. But other luxuries can be investments. Collector’s items may increase in value. Homes and properties may do the same. Education is an investment in your family’s future (and their future wealth) – a wealthy Torontonian who sends her kid to RHMS or a rich American who pays his kid’s way through Harvard won’t necessarily see a return on that investment themselves, but when we look at the family as a whole, we see that luxury as an investment that may, on the whole, create more wealth. If you stretch your budget for any luxuries, these are the ones to choose.
Nobody is saying that the rich don’t live incredible lifestyles, but remember that the rich who stay rich are always living within their means. It’s just that their means are incredible – because they and their families have chosen to save and invest to reach this point!