How Do People Get Rich?

    Few people will risk the embarrassment or potential judgement of asking the question out loud. Nonetheless, we have all considered at least once, about what the universal method is for becoming “rich”. For the purpose of conversation, let us establish that “rich” shall be defined as having an annual income (be this from monthly salary, capital gains, sales, dividends…anything that increases your net worth) that is larger than those around you. Of course, we could well argue that “health is wealth” or any other number of platitudes, but there are some conclusions available to those willing to look for them. So, how do people get rich?

     

    The basics of getting rich

    Unless you win the genetic lottery and are born into a wealthy family, you have work to do. Literally. You will need to have a job that pays you an amount of money which is more than your cost of living- i.e you are going to need to have money left over each and every time that you get paid. If you are earning 10,000,000 JPY a year and complaining that it does not cover your cost of living, then you do not need a new job, you need to adjust your expenditure; making the necessary adjustments to carve out enough space for “disposable income“.

    The ephemeral state referred to as “rich” is just the culmination of a process- of the accrual of money over and above that which you spend. It is in essence all “disposable“. Simply put, you must get money, and you must keep that money. Expenditure, for the most part is at odds with wealth accumulation. Most of the time that people attempt to rationalise a purchase as an “investment” or being “valuable because…”, they are simply trying to sidestep their own feelings of guilt because they know themselves, that spending money is a terrible strategy for keeping it.

    Saving your way to wealth

    Many online financial gurus will argue that saving ‘is for idiots’ and that nobody ever got rich with a bank account. Ultimately their soapbox pitch ends with a proposition that directs your money into their own bank account, but this aside, their statements are in fact correct. At present the rate of interest offered to depositors at banks is lower than the long-term average annual rate of inflation, meaning that each and every year, cash held in the bank will lose purchasing power. But what about Brazillian Real or Indian Rupees? The rate is XX%? Same thing. The rate offered by the bank in any country will, without exception, be lower than the rate of inflation on that currency. Everything is relative, and inflation is global.

    So why bother saving? Why not pile all the money you have into a start-up and revolutionise the way that we farm mackerel? Because it’s a terrible idea, and you have bills to pay, and require a degree of financial stability. You should always be saving money- not with the objective of having it sit in the bank, but you will need to accumulate money before you can move on to the next stage…

    Getting Rich With Investments

    If you are searching for “investments to make me rich” then you are about to get an expensive education in what not to do. Any investment which has potentially explosive returns is also going to potentially expose you to explosive losses, and as you know, it is hard to become wealthy if you are losing money. Accordingly, you should aim to invest all of the money that you have saved, over and above the amount you need to meet your short-term expenses, in safe places. Your investments should be diversified, monitored and maintained, and easy to understand. Once you’ve dipped your toes and made some investments yourself, and accumulated an amount that you would be alarmed to lose, look to hire a financial adviser to support you moving forward. If you are able to continuously save and invest without making any serious blunders, you will inevitably end up with a sum of money that many would be envious of. If you are able to stick to it throughout your life, the total sum will be substantial. Generally we call such people “rich”- and not a silicon valley start-up in sight.

    All Of The Above Is A Lie

    Both of the methods above are predicated upon you having a regular income -a job- and working for somebody else. For most people, their salary is fixed and they have limited upside, outside of a small percentage increase each year (this is particularly true for Japan). Because of this, again, keeping money in the bank is a surefire way to guarantee failure. Your money will not grow in the bank, and your salary feeding your bank only grows a nominal amount each year. Are jobs a terrible way to get rich? Possibly.

    In America the IRS compiled a list of the 400 largest income tax returns over a period of years in aim of understanding where these so called “rich people” come from and what got them there. The lowest annual income on the list was 77 million dollars, and the average was 202 million dollars. You can probably already guess that the 202 million dollars in income isn’t written exclusively in the “interest from cash deposits at the bank” column…

     

    The breakdown is as follows:

    – Capital Gains: 45.8%
    – Partnerships & Corporations: 19.9%
    – Dividends: 12%
    – Interest: 6.6%
    – Wages & Salaries: 8.6%

     

     

    Conclusions

    There are a number of solid takeaways here. It could be argued that working wont make you “rich”. Most of the people on this list, at present, own their own businesses. Does this mean that you should quit your job and go it alone? Maybe, but only if you already have enough wealth to maintain your lifestyle, in the event of the failure of your new business. All of the business owners on the list were not born business owners. They likely worked, saved and invested just like everybody else. At some point they may have found themselves in an industry that was profitable and set up their own companies, but it is highly unlikely that they stopped investing because they became business owners.

    It is absolutely possible to work as an employee and retire wealthy. The only problem is that it is not quick, nor easy, nor sexy. It takes commitment, which is hard. Not everybody can start a business, grow it into profitability and then sell it for millions of dollars. Everyone can however hold down a job, save and invest. As is often the case, there is no “correct” answer or method here and different things work for different people. Just do not be fooled into thinking that wealth is the privilege of the wealthy. If you are able to live within your means and make smart investments, after a number of years you may not be in the “top 400” list, but looking back, you will likely have a net worth more in line with your idea of “rich” than when you started.

     

     

    [ Sources ]

    – United States Inland Revenue Service: The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2009

    – A Random Walk Down Wall Street: Including a Life-Cycle Guide to Personal Investing, Burton Malkiel

    – The Science of Getting Rich, Wallace Wattles

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    How Do People Get Rich?
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    How Do People Get Rich?
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    What do most wealthy people have in common? We explore...
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