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In today’s article, I’m gonna share with you five ways the rich build wealth that the poor don’t.
Method number one – They track everything
If you ask the average person what percentage of their income they spent on living expenses and entertainment last month, they likely wouldn’t know. You would probably get the same blank stare if you ask them how much they saved last month.
This isn’t shocking as 61 percent of American adults don’t employ any form of budgeting, but if you ask a rich person they will tell you that budgeting your expenses and tracking your spending is critical to financial success.
Many rich people use that two-step process to budget their money. First they determine their expected income for the upcoming month. This will include their salary or business income as well as possibly come earned through their investments.
This total figure will be the starting point when they employ the twenty thirty fifty budgeting method. The budgeting technique works by dividing your income in the following way; fifty percent is designated to living expenses like rent utilities and groceries, the next thirty percent goes towards entertainment costs like going out to eat or seeing a movie. Finally, twenty percent is meant to go right into your savings account.
Once their budget has been established, the rich then diligently track their spending. Most millionaires will connect their credit cards to apps like mint that automatically categorizes or purchases into budget categories, however some millionaires still do things old-school, for instance they will track their purchases on the notes’ app in their phone and manually add the totals at month’s end. Either way, the rich track their money because they know that what isn’t measured, it isn’t managed.
While you may not feel like it’s as important to track your spending when you aren’t earning a massive income, the truth is that, the sooner you can start building good financial habits, the better.
Method number two – They employ financial discipline
if you ask any millionaire the key traits in becoming rich they will surely mention discipline. This is because discipline is involved in all aspects of becoming wealthy. For instance, if you want to get a high-paying job, you have to have the discipline to get a good education which takes years of intense studying in preparation, or if you become rich through building a business, you will have to employ discipline to work on your company even when your friends are out partying and having fun.
Once you start making big money, the discipline only becomes more important. It doesn’t matter how much money you make, you will never be rich if you lack the ability to save and saving takes discipline. That could mean driving the car you’ve had for 10 years rather than spending thousands of dollars on that new sports car you’ve had your eye on. If you read any major financial book or listen to any successful entrepreneur, you will find that they consider saving money as one of the foundations of building long-term wealth.
The crazy thing is that according to CNBC, 57% of Americans have less than $1,000 in their savings accounts and 39% have no savings at all. I know saving money can be difficult, but there are a few methods that can help make it easier to put away money.
The first method is to set up automated deductions
In fact, one of the best things I ever did for my finances was setting up automated deductions for my pay with my employer in essence what these deductions allowed me to do was send part of my paycheck directly into a savings account instead of the full amount going right into my checking account.
When I initially set up this process, I allocated 10% of my actual income to my segment account but over time I have found that I’m able to up this amount to 20% and double my monthly savings. Setting up these deductions helps you avoid spending your entire paycheck, meaning that saving money is guaranteed.
The other way to increase your savings is to start earning more
The truth is your ability to save is restricted by how much you earn, but sadly most people’s only strategy for saving more money is cutting costs.
Cutting cost is a great start because you can realize quick wins in the saving department but realistically you could only reduce your monthly cost by so much you will always have to pay for things like housing, food, and transportation.
Meaning that if you want to take your savings to the next level, then you need to focus on the other half of the income statement which is your earnings.
Method number three – They live within their means
When most people think of the millionaire lifestyle to think of rich people spending endless amounts of money on designer clothes and fancy cars but in reality millionaires are quite responsible spenders who live within their means and one of the ways that they’ve been able to amass the wealth they have is by avoiding the income trap.
You see, when most people start earning more money, they begin to spend more. For instance, your standard sedan may suffice when you’re earning $50,000 a year, but when you suddenly find yourself running double, you may gravitate towards getting a luxury vehicle instead.
This rise in spending can be attributed to what’s known as Parkinson’s law. Parkinson’s law states that work expands to fill the time available for its completion and in the financial context.
It means that you will spend it up to the amount you have available, and available doesn’t just mean the money in your bank, which is why people will go broke and then some by maxing out their lines of credit and credit cards.
The reason this phenomenon takes place is due to a lack of financial control. Unfortunately, school teaches things like how to find the slope of a line, or how to write in cursive but it never teaches you how to create and maintain a budget aka real life skills, therefore unless you have family or friends who bestows sound financial principles upon you, then you are almost destined to run into money management issues later in life.
This habit of living below your means is especially important for those who run their own businesses, because as a business owner, there will be good times when you’re making significant revenues and bad times when your business will decline, but if you spend well beyond your means when times are good, then you will not be able to weather the storm of harsh economic times likely causing your business to go bankrupt. Once you master the art of living within your means, it can set you up perfectly to begin employing method numb four.
Method number four – They put their money to work
Life is like a game of Monopoly, the person who owns the best properties on the board makes the most amount of cash. Normally, these investments make them positive income as the game goes on, but they can be disposed of for a significant lump sum at the end of the game.
However, you can only acquire these investments with your cash which is why the rich put your money to work through investing. Unfortunately, when the average person gets paid, they either spend it or at best, stick the money in their savings account.
Putting money in savings account is definitely better than blowing it on frivolous items, but the problem with this method is that sending money to your savings account every month will not grow your wealth. The average savings account yields just 0.09 percent interest annually, which means that even if you have $50,000 in savings, you would earn a measly forty-five dollars in interest.
This is why the rich make a point to put their savings to work through investing and the earlier can start investing, the better. Just take Warren Buffett as an example, Buffett bought his first stock at age 11 and by strategically investing over the course of many decades, has become one of the wealthiest people on the planet, but it’s not just billionaires who practice ongoing investing on average.
Millionaires invest 20% of their household income each year making investing a significant part of their wealth accumulation strategy, and if you think the millionaire’s invest in exciting products, you may be surprised most millionaires invest in the same things as the average investor like a Roth IRA and a 401 K but also send these investments to include things like real estate properties and personal development.
Method number five – They never touch the principal
At this point, we know that the rich track their spending diligently, they employ financial discipline, live frugally, and put their money to work, but what really separates these wealthy individuals from the poor is that they never spend their principal.
While they previously said that most millionaires live frugally, some do like to spend on luxury items and while you would think that spending large sums of money would ruin their wealth or even make them poor, it doesn’t because they never touch the principal.
In financial terms, the principle is the original amount of money put into an investment. For instance, if you were to buy 10,000 chairs for $100,000 that paid an annual dividend of $2 a share, the hundred thousand dollars you invested will be the principal and at $2 a share or the twenty thousand dollars will be the dividend income.
In short, the rich never detract from the assets that are already earning them income, meaning that their wealth will never decline due to their spending.
Rich Dad Poor Dad author Robert Kiyosaki alluded to this method of spending in a recent tweet where he said, live it up, buy everything you want, one caveat buy the assets to pay for them first.
Roberts been known to use this basket of investment properties to fund his purchases like when he goes on vacation or buys a new car. Unfortunately, most people generate their cash flow in the form of active income by trading time for money when you only earn active income. It means that any money you spend is directly reducing your wealth.
As income earned but not invested will never grow to a point where you can spend the excess cash it produces. So what type of investments can you use to make you passive income? Some of my favorite passive income methods include affiliate marketing, investment properties, dividend stocks, and real estate investment.
In conclusion, if you want to continue growing your wealth while still being able to spend from time to time you must only spend the income that your asses generate and never the principal.