My Mom loved to watch people. She loved to see how different folks dressed, acted and talked. She often wished to see how the “Other” half lived.
Her background was lower middle class. She and Dad worked hard and moved up the wealth chain, allowing my spouse and I to move up even further. Along the way, I learned some things that are seeming secrets of the wealthy.
Here are several ideas on what I think the rich know that the rest of us don’t.
Long term thinking matters.
Whether it is slowing saving money to invest or gradually growing their business, rich folks know that they are in it for the long haul. Sometimes they are in it for generations. Planning for 100 years of financial prosperity in a family is a major theme in one of my favorite books (Strategy for the Wealthy Family – Seven Principles to Assure Riches to Riches Across Generations).
Rich families understand the power of compounding, the time value of money and the use of leverage to grow their enterprises.
The rest of us are usually just glad to get from paycheck to paycheck each month, with perhaps a bit left over for a splurge or two.
Goals and perseverance are more important than savings.
Although establishing a sound monetary base by saving what you can is important, it can be more important to envision and set specific goals and persevere in moving toward them. If you want something badly enough, you will find a way to try for it. If you don’t have a strong desire, you won’t.
The rest of us may also have goals, but they can be too short sighted (as in a goal to vacation to the beach next year) or not specific enough (as in …someday I want to be rich) or not desired enough so that we don’t persist in looking for and thinking of ways to get there.
Its who you know, not necessarily what you know or can do.
My sister-in-law and her former spouse worked hard to put themselves into a premier area, surrounded by successful neighbors, whom they got to know well. Their boys grew up as equals to privileged classmates who considered it normal to aspire to elite colleges or to have their own business.
Two of four boys have opted to pursue medical degrees and both were able to obtain full ride scholarships at an elite college to do so – in part thanks to the people the family knew. Of course those boys were also educated well and did well in school too. They had both educational and extra curricular excellence going for them.
The rich nourish their relationships as a key part of their financial lives.
The rest of us either don’t develop enough beneficial relationships or don’t utilize them to help each other.
Ways to avoid the tax man.
Wealthy folks seek methods to legally reduce the impact of taxes. They start businesses so they can deduct expenses or hire their sons and daughters (thus giving them income that can be used to fund retirement accounts). They plan how to pass along their wealth to their desired recipients, using tax law to make sure that the recipient gets the most benefit.
The rest of us have no way to avoid the tax bite, as it is deducted before we even see our salary.
You have to take appropriate risks.
Wealthy folks truly know that there is no free lunch. If you want a reward, you have to take a risk to get it. BUT, they also know that there is a time and a place to take those risks. Taking out a huge loan to fund a business idea that hasn’t been evaluated sufficiently is not an appropriate risk to take. Investing every spare dollar in the stock market when you don’t have enough to pay next month’s rent is also not an appropriate risk to take.
Rich people know that they can take more and more risks as their financial foundation becomes more and more secure.
The rest of us get impatient and take risks prematurely. Then when the bad result of the risk is realized, we vow never to risk again.
You can’t depend on a single source of income.
The rich don’t trade time for money and don’t depend on just one source of income. They know that all money is at risk and nothing is certain. That is why they don’t depend on one salary to live. They diversify their income streams. They start businesses. They move assets to other entities to protect them.
The rest of us learned the hard way during the recent great recession that having only one source of income can cause devastation when that income stream dries up.