An investment in knowledge pays the best interest. – Benjamin Franklin
The secret is a simple one: Education. I’m not talking about going to Harvard or some elite university. I’m not even talking about a Masters or a PhD degree. I’m talking about fiscal education. The rich are rich because they know how to manage money. They know how to put it to work and make it grow. By contrast, the poor know only debt. How to get into debt and how to get deeper into debt. Money management is taught in the school of life, not the universities.
The rich and poor just think differently about money. The rich think in terms of assets and liabilities. It’s one of the few enlightening things Robert Kyosaki has said in all his books and seminars: Assets put money into your pocket, liabilities take money out of your pocket.
The poor buy things they cannot afford with money they have yet to earn and focus on low monthly payments, ignoring the aggregate cost of the interest over the life of the loan.
The rich buy things they can pay for outright with the money they have saved or generated from their streams of passive income. When they do take out loans, they are for things that have a greater return than the cost of the loan. The rich take loans to start personal businesses that yield tax advantages and returns on that money that a large screen HDTV bought on a credit card at 19% interest doesn’t provide.
Most of those considered rich in America earned their wealth. Only 3% inherited it. Some fall into it, but never really learn to manage it. I’m thinking of celebrities like M. C. Hammer, or Ed McMahon. The vast majority of Millionaires are small business owners, or investors.
Look at Warren Buffet. He is one of the richest men in the world and he started from humble beginnings. He was not born into wealth, but he was born into a family that provided him with the essential element to becoming wealthy: knowledge. His father was a stock broker, and Warren learned to think about money the way the rich do at an early age.
He mowed lawns and did odd jobs to generate earned income, and later put that money towards stock investments. He made mistakes early on, but he learned from them and started his own investment company and continued acquiring assets instead of liabilities. The rest is history.
Contrast that with any number of people you may have grown up with, or may work with or come across in other aspects of your life. The working poor.
I have a friend who lives alone and makes a fair wage. He’s consumed with consumerism. He spends most of his discretionary income on liabilities: Computer games, iPods, dinners and movies out, a cup of Starbucks every morning, a new car. I was guilty of this myself at one point. Then I started educating myself and it changed my entire view of money. Instead of thinking of that new PC game as “only $50”, I began to think of it as 1 share of Coke-A-Cola that would pay me dividends. No computer game would do that. I started thinking about the price of items in terms of stock price, yield and future return, instead of just the dollar cost of the item today. I saw all that “stuff” as something that would take my money instead of growing my money.
Here’s another secret of the rich: They work for passive income instead of earned income. Earned income requires direct effort to acquire, and is taxed higher than investment income. Factor in favorable tax treatment for owning a business and you have a much greater chance of building wealth.
Rich and poor are both states of mind as much as a state of finances. Which state would you rather be in?