Invest Like The Rich: The Two-Part Wealth-Building Formula

House keys over the hundred dollar bank notesYou’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.

It’s these differences that make them rich.

The rich use certain financial tools and understand certain investing principles. They also adopt an investor’s mindset that leads to profitable investments.

If you want to become rich, you must follow in the footsteps of the rich. Let’s see what they do and how they do it.

Financial Independence

For the rich, 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 the monthly expenses.

This is income that comes from investments, whether stock dividends, bond interest, real estate rents, tax lien interest, 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.

Passive Income And Portfolio Income

There are two types of income that investments can generate: passive income and portfolio income.

Rental real estate generates 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 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.

Position Yourself For Wealth

To become wealthy, 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 already done if you are reading this!) and then go out and find suitable investments.

There is a saying that 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.

The #1 Rule Of Money

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:

You have to spend less than you make.
You can’t become financially free without having money to invest.

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.

The Two-Part Wealth-Building Formula

The rich follow a simple two-part plan:

1) They convert their earned income into passive or portfolio income.  

2) They buy assets that put money, or potentially can put money, in their pocket. They take the income they earn from their job or business and invest it in assets that pay dividends, rents, royalties, and other forms of income.  This is called cash into assets.

This is why the rich get richer!

In contrast, the middle class and poor buy things that lose value or are consumed immediately, or they purchase things that take money out of their pocket each month via debt or credit card payments.  This is humorously called cash into trash.

Assets & Liabilities

Now, you may be wondering exactly what an asset is.  Assets and liabilities are two key concepts you must understand on your journey to becoming financial independent.

Robert Kiyosaki has written extensively about this in his Rich Dad, Poor Dad books which I highly recommend.

He describes them as this:

An asset is something that puts money in your pocket.

A liability is something that takes money out of your pocket and puts your money into someone else’s pocket.

Simple but effective.

Let’s do a simple quiz to determine which items are assets and which items are liabilities.

A car loan is…. a liability.  It is something that takes money out of your pocket and puts your money into someone else’s pocket (the lender’s).

A bond is….  an asset.  It is something that puts money in your pocket (as interest) and takes money out of someone else’s pocket (the person or entity you lent the money to).

A dividend stock is…. an asset.  It is something that puts money in your pocket in the form of cash dividends.

Credit card debt is… a liability.  You are making the credit company rich….

Rental property is… a liability if it loses money each month.

Or….

Rental property is an asset if it is profitable and cash flow positive each month.

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