I was reading Free Money Finance the other day and was enamored with one of the interesting articles that discussed the most important factors making people wealthy. FMF presented results from a book that showed how a group of individuals made money in life and eventually became what is considered, “wealthy.”
How do people get rich? We all talk about how we want to make lots of money in the future but do we really know how to get there? Why not follow what others did? The findings come directly from individuals that got wealthy in life and took some time to reflect on their success.
Of course you don’t have to listen to a 20-something behind a computer screen but I hope you take the results of real life millionaires seriously.
The top 2 reasons the people felt they got rich/wealthy in life:
Habitual Saving
Wait a minute. So you actually have to save money to accumulate wealth? This shows that getting rich is not a slow process. It is a process that involves spending less than you earn for as long as you live. Are you willing to ditch the credit card and spend less than you earn? If so then slowly but surely you will begin to accumulate money in your bank account. As time goes on, and with compound interest on your side, your small weekly savings will end up a nice large sum. You could argue that this is boring and slow but I would rather know that I’m on the right track as opposed to gambling with my hard earned savings.
Sound investing
This doesn’t include chasing momentum or constantly seeking the next hot stock. It involves investing your money into investment vehicles that you understand and trust. It doesn’t matter if you invest in stocks, mutual bonds, bonds, CDs, or a online savings account, as long as compound interest is on your side (and the market doesn’t completely crash) your savings will grow.
Before you can begin investing, make sure you have found a debt elimination plan to get rid of all of your debt.
At the bottom of this list of factors influencing how everyone got wealthy, guess what was there? The two least common methods of getting rich over time:
An inheritance
I wrote about this in my post on how to get rich quick. If you plan on taking it easy until you inherit money you will be in for a surprise. After all of the time has gone by and once you figure out what you were left behind with, you will still have to pay all of the relevant taxes. Once that is all complete you will realize you are far from rich. If you do plan on inheriting some decent money don’t let it be your saving grace. The money will help you with your savings goals but it will usually not provide you with financial independence.
Starting a successful business
Okay I’m surprised about this one. I know that many small business and new business ventures fail but I still thought starting a successful business was a more critical factor influencing the accumulation of wealth.
I’m guessing the keyword here is “successful.” We can all start a business and make some money from it but we will experience varying levels of prosperity. This probably also includes individuals that have lost money as the result of a new business venture. With that being said, I still strongly believe that college student should consider starting a side business.
Other factors on getting wealthy that made the list (top to bottom): a high paying job, an advanced degree, buying a first home, and getting married.
What is your take on these various wealth accumulation strategies? Are you working on any of them? Would you like to improve on any areas? Please do share with us!
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My view on this topic is that someone first needs to get out of the point in there life where all they can pay for (responsibly, without credit) is their needs. This includes a place to live, transport to the job, food, clothing, etc.
The best way to do this tends to be getting an education so you can increase your value and get yourself a higher paying job (or advance your skills in your current job). Once you’ve begun a career, you can surpass living on just your needs and diversify into wants and savings.
At this point people tend to go many different ways. Some may spend nearly everything they make on a nice car, house, cloths, etc. and put very little into savings. Others may live on their tiny previous salary and put everything into savings. I imagine most do a balanced version of the two.
At this point the definition of rich seems to get somewhat fuzzy to me. Sure the person who purely saves all of their money until retirement has more in the way of assets than the person who spends all of their money. But that person also may not have lived life to the fullest (taking vacations, etc.) during their working years. On the other hand the person who spent all of their money may have run into a very big issue (medical problems unpaid by insurance) and have no money to deal with it and are in the poor house later in their lives.
I think it’s very hard to get a good balance between living a good life (what else is it for?) and accumulating assets.
You brought us to the perfect point Edwin- striking a balance between today and tomorrow.
There are those individuals that soley live for today. They believe in instant gratification. They want to travel the world, have a nice car, wear the nicest clothes, and buy the many other luxuries of life. They are not overly concerned with the future because they believe they will have a steady income for many years to come.
There are those individuals that soley live for tomorrow. They save every penny. They wear a jacket inside in the winter to save on heating. They never buy coffee. They stay in. They will be prepared for tomorrow but at what expense.
My goal over the last few years has been to strike the perfect balance. I love to travel but I know this means I will have to sacrifice. I know that I can’t go out as often and I can’t spend as much money on clothes.
My opinion is that striking a financial balance relies greatly on your ability to sacrifice and delay gratification. What do you/and the readers think?
I think people tend to think of their potential income as their current income. By this I mean someone who perceives themselves performing well at work may be expecting a promotion, this might make them feel like they can spend as if they were guaranteed that promotion. It works the same with people about to graduate from college.
In this case people really do have to make the hard decision to delay spending any of that money until they actually have it.
Another factor is the keeping up with the neighbors syndrome where people will spend more than they can to keep up with neighbors or friends. This can mean anything from going to entertainment venues slightly out of their price range to buying a better car because they feel out of place.
Obviously it’s not as simple as just those two examples but those are two major ones that pop into my mind.
Yes I agree that “keeping up with the Joneses” can take a toll on you financially. It is very easy to fall into this trap as well. When we see what our friends have we not only want the same but we want better. The trick is to slowly get to a point in life where material items do not define who you are.
Wow, this commenting is getting really insightful! Material items do not define who you are, but society would like us to think otherwise. You are right, it is so hard to strike the perfect balance. Sometimes you DO have to live life to the fullest, you really don’t know when your time is up. I know that typically people do their traveling around the world after they retire, but I think us 20-somethings are rethinking/revising that notion. Why wait until you are 65? Why wait until you are just retired and you get a diagnosis of cancer? (sorry to be a Debbie Downer, sad but true story that I’ve heard many times)
Hunh, interesting results. I can see habitual saving and sound investing as keys to developing wealth; it’d be hard for most of us to become comfortable (to say nothing of rich) without good amounts of saving and some investments. The inheritance comments also make sense; with the exception of the occasional odd heiress, most of us don’t have wealthy parents or grandparents sitting on gobs of cash we’ll eventually inherit.
The one that surprised me (and you. to judge from your comments) was starting a business. I suppose that the successful ones are so popular and famous (Bill Gates and Microsoft, Steve Jobs and Apple, the Google guys, etc.) that you tend to ignore the millions of others who either fail or simply experience more moderate levels of success. Still, like you, I think spreading your entrepreneurial wings is a good thing; at the very least, you’ll have that much more experience for the future.
When you mention as a method to get wealthy, I think there is a specific distinction to consider.
Majority of people today are self employed while few actually run businesses.
Whats the difference? Ask yourself, what will happen if you walked away or took a day off from your business tomorrow, would it run or would it crush?
Great points and I have nothing substantial to add but I would like to switch gears.
Gentlemen I want to ask you this question: have you found your balance yet? If not, what steps are you taking to find your balance?
Great post! It really makes sense to look at what wealthy people have done and do the same. Sounds stupid, but it works.
Also, totally agree that college students should have their own businesses. Without a business, college students are simply brainwashed into becoming employees and staying poor for their whole lives.
Anybody wealthy here? Obviously not. If you are wealthy, please share your success story. Did you inherit it, invest it? Is it possible to start with nothing and gain financial freedom or even wealth? Thank you for your advice everyone.