You’ve heard the saying, “The rich get richer and the poor get poorer.” This saying is true.
It is true because the rich take the time to get an education in money, personal finance, and investing. Because of this education, they think differently about money than the poor or middle class. They do things with their money that the poor or middle class don’t do.
And these small differences make them rich.
The rich use certain financial tools and understanding certain investing principles. They also adopt an investor’s mindset that leads to profitable investments.
Let’s see what they do and how they do it.
The ultimate goal of investing is financial independence. Financial independence is having more money coming in from investments each month than is going out with your monthly expenses.
The important point is that this income is not from working at your job, but from investments, whether stock dividends, bond interest, real estate rents, tax liens, or ownership interests in a business. It is not income earned from working at a job or from self-employment. This is a key distinction.
There are two types of income that investments can generate: passive income and portfolio income.
Real estate generates what is known as passive income, which is income from rents.
Stocks, bonds, tax liens, and gold and silver generate portfolio income, which is income from dividends, interest, royalties and capital gains. Capital gains are just a fancy word to describe the gains from selling a stock, for example, at a higher price than what you paid.
The key to financial independence is passive income and portfolio income, which I like to call mailbox money.
Money doesn’t buy happiness, but it can buy freedom – freedom of choice and freedom to be able to do what you want, when you want.
Imagine that you have financial freedom… How would it feel to be free from money concerns, free to do what you want, when you want it? How would it feel to have the freedom to make choices about how you want to live, and where you live – and not having these choices being determined solely by your bank account?
The first step is to realize that you have to position yourself for wealth. You have to put yourself in the right place to learn about investing (which you have if you are reading this!) and then go out and find suitable investments.
There is a saying: If you face east waiting to see a sunset, you will be waiting a long, long time. Likewise, you can dream about making lots of money, but unless you actually go out and do something to make money, it is not going to happen.
Success is a learnable skill. There are certain rules or laws of money that if applied can change your financial picture completely. The first and most important rule is:
Think about it – in actuality, a single person making $25,000 a year and who manages to save $2,000 each year is far better off than someone making $200,000 a year but spends $200,000 a year.
There are many misconceptions about becoming rich. Here are just a few statements that we’ve all heard over the years:
“The rich are just greedy”
“The rich make their money off the poor”
“The rich only became rich by taking advantage of other people”
Are they true? There is no question that if you only read the stories that appear in the news, you could conclude that the rich are immoral, lying, and cheating thieves. And, let’s face it, some of them are. But there are probably ten times more immoral, lying, and financially desperate poor people running around than the rich ones.
Money worries and a lack of money are the #1 biggest causes of stress in modern society. And part of what causes these problems is that people get caught in the rat race.
I personally feel that the media and advertisers are the biggest culprits. It is very easy for people to fall prey to the call of advertisers in our consumption driven society. We are bombarded by ads 24/7.
These commercials show us just how much better our lives will be once we buy their product or service – we’ll have more fun, a better love life, more money, more excitement and adventure, more of everything. And at the same time, we’ll have less stress, less boredom, and less loneliness.
Somehow they always fail to mention we’ll have less money too!
As people advance in their careers, get raises and promotions, and make more money, it becomes easy to expand their lifestyles. It’s only natural that the good things in life go from being luxuries to necessities – expensive cars, a big house with an even bigger mortgage, designer clothes, private school for the kids, etc.
But what usually happens is that the spending gets out of control and people find that all of their income each month goes out with the monthly bills.
The solution seems to just work harder. But as people’s income goes up, their income taxes and Social Security and Medicare contributions go up in addition to their expenses. The amount of money going out each month always seems to be more, not less.
No matter how hard they work it becomes even harder to save and invest. This is the rat race, and without investments that can provide additional income, they cannot get off the track. They can’t win.
The only way out of this rat race loop of “earning to spend” is to stop spending all your income, live beneath your means, and start to invest some of your money. This is the only way you can start to have your money work for you.
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