The Sunday Times Rich List 2018 had some fascinating insights. The list, released on 13th of May, shows that self made entrepreneurs now dominate the top of the list as opposed to old money did in previous times. This got me thinking; what are the people at the top doing to get and stay there?
Rich Dad Poor Dad – Leveraging the Philosophy
Although the list is very diverse in the ways that the fortunes were made, there are a number of common traits which are possessed by the successful. The wealthy tend to accumulate assets which generate income instead of liabilities which can drain your finances considerably.
This methodology is clearly defined in one of the great investing books; Rich Dad Poor Dad by Robert Kiyosaki. However, in this article, I look into exactly how the wealthy tilt this strategy and do things in ways that others don’t.
In the belief that appearing wealthy needs one to have flashy property such as cars, clothes or jewellery, people tend to spend most or all of their savings or use credit to acquire these. This is not effective and will only result in you looking wealthy but you will really not be.
A carpenter’s tools are vital to them
The main difference is that the wealthy build up their assets (tools) first and then, like a carpenter, use the proceeds of these assets to help obtain other properties which can be classified as liabilities. You should not assume that these individuals are wealthy because they may already own fancy property but that the properties are a side effect of having other income producing assets.
Using this approach, it is easy to see how it is a lot easier to accomplish financial objectives once you have amassed substantial assets. This is best shown by an example:
Imagine if you want to buy a car worth £10,000. A person with poor financial literacy would probably use a loan or car finance to make the purchase as quickly as possible. At a typical loan rate of over 5% a year, the total payment can be over £12,000 after a few years. If the person saves £500 a month it would have taken them 24 months to raise the full amount.
A smarter approach would be to save up front and then buy the car for cash. At the same £500 a month savings rate it would take 20 months to cover the £10,000. That is a full 4 months better of than the borrower. Look at it as 4 months of getting up early and going to work every morning, dealing with everything that comes with it, wasted. Time is our most valuable commodity and is finite.
This may seem impressive but there is an even more fascinating way to look at this by using the number 1 secret of the rich.
For the third approach, imagine that you are an employee and first build a portfolio worth £50,000 which can consist of income generating assets such as stocks or rental real estate. Assuming an annual return rate of 10%, after a single year the portfolio would have generated £5,000 of income. If you decide to purchase the vehicle at this point it would only take another £5,000 of your hard earned income.
If you were prepared to wait for 2 years, the portfolio would generate £12,000. Enough to cover the purchase without the need for any hard earned cash at all. For a 3 year period which is typical for a car loan as in the first scenario, a very large amount can be raised which can allow you to by a more premium car without much effort.
This is just a small example but the same line of thinking can be used every time you purchase liabilities such as cars and a house you leave in. This requires a lot of restraint and delayed gratification but you will reap the benefits before you know it. Spending it all without having built up a substantial asset base is like taking the tools away from a carpenter.