7 Strategies The Wealthy Use To Get Richer
However, there are certain replicable aspects of how the wealthy get richer, which can be modelled by anyone.
I have spent time with both the wealthy and the not so wealthy, and it is clear that there are vast differences in approaches to money and life.
Beyond being able to write bigger cheques, the wealthy have a different mindset, which has a bias for value creation.
If one has become wealthy through putting in the work over many years, then the chances are, they’d always remain wealthy.
To some, this might come across as unfair, but life just happens to reward those that do what it takes.
In a perverse way, the more money you have, the easier it is to make more because you’ll have understood certain principles about money and made mistakes.
Today we dive into some of those principles and how they might be useful to anyone interested in growing wealth.
Below is a summary of seven strategies that the wealthy use to get richer. It’s by no means a complete list, but does cover some key strategies:
1. Focusing On Assets
Think of anyone rich that you know or have heard of, and it will be clear that the path to wealth creation is to focus on assets.
These could be illiquid assets such as business assets, property or alternative investments.
Or they could be liquid or near cash investments in funds (passive or actively managed) etc.
This focus on assets creates wealth because of:
- Ownership – This gives access to dividends, rental income etc and the potential to get rich from capital gains.
- Control or Significant Influence – This gives the power to make decisions and call the shots on your assets.
Control exists if you have 50%+ ownership and Significant Influence exists with 20%+ ownership.
Really rich people aim for at least 20% ownership in any assets they own.
How this can be applied today:
You might be wondering how on earth you could ever get your foot in the door with any of such assets above.
Some asset classes are certainly easier to access than others.
What's interesting is that most rich people you see today didn't get rich in one day or even one year.
They too will have been on a journey and started with what they had in their hands.
Often this is a small business created with the intent for sale.
Once that sale happens some years down the line, the entrepreneurs would either reinvest that money in another business and/or in other asset classes like property for recurring cashflows.
This aspect of taking money from one asset class and reinvesting it in another is key to wealth creation.
You see this done a lot between business assets and property assets.
The more one repeats this, the more one’s net worth will increase over time as compounding goes to work.
Another important point to make here is that making your first million takes time! A lot of time.
But by the time you get there, you'll have learnt enough to shortcut the next million.
There's in effect a compounding effect at play both in terms of ability to generate wealth and the extent to which wealth generated can create more wealth.
The other really exciting aspect to all this is that the barrier to entry into certain asset classes such as businesses are now so low thanks to the availability of technology.
Rather than pay a large amount to acquire tech, you can now pay small amounts monthly whilst you experiment.
It's for this reason that I can run The Humble Penny as a business created by starting a blog.
Focus on creating assets with a goal of capturing value either through ongoing income (dividends etc) or via an eventual sale.
Remember, income for the short term but assets for the long term.
2. Minimise Taxes
Putting money to work in a tax efficient way is a necessary way of building wealth.
Some take to this to whole different level and border on tax evasion, which is illegal.
More generally, as you become more sophisticated over time, tax ranks high on the priority list.
Employees are typically taxed the most, and this gets better if you own a business.
How this can be applied today:
Your investment decisions should start to prioritise tax as you get wealthier.
If you’re an employee today, you want to invest in enviroments that get you some of your tax back.
For example, investing through a Self invested Pension Plan (SIPP), helps you get back tax paid on amounts invested from net income.
Saving and investing through your ISA not only ensures you’re using up your annual allowances, but it also provides that much needed shelter for capital gains tax.
Inheritance tax is also a big consideration especially if you own a home in a major city like London.
So ensure you start to read up on ways in which inheritance tax can be mitigated legally.
Business Property Relief (BPR) is a major way in which rich people mitigate inheritance tax.
There are investment products designed specifically for this, which you can find easily with some light research.
These aim to reduce the time that a gift of property from one person to another is potentially caught by inheritance tax from 7 years to 2 years.
More on inheritance tax strategies in the near future.
3. Use Leverage
The most common use of leverage is with money and this is typically seen in property investing or in complex financial transactions such as stock lending.
Sticking with property to keep things simple, the wealthy borrow money cheaply and use this to acquire assets that generate a return.
This is typically referred to as Other People’s Money (OPM) – Essentially using money from other sources to create value.
I talk about reducing personal debt a lot on this site.
However, if you really want to build serious wealth, you’d have to get used to using debt as a vehicle as it’s quite cheap.
Other ways the wealthy use leverage is with relationships.
Rather than become master of everything, they’d build a team around themselves and deploy the team for various projects.
So sticking with property – A team will include an accountant, a surveyor, a broker, a solicitor etc.
A third way they use leverage is with their time.
The focus is on using time for activities that add the most value e.g. generate the most revenues or returns or time with loved ones.
Such activities are the Most Important Tasks. The “MIT”.
Low value yielding activities are avoided or outsourced using Other People’s Time (OPT).
The final piece of leverage comes through leveraging the mind.
A small minded person has a different way of thinking to a big thinker.
The wealthy open their minds up to new ideas and remove limitations.
They focus on learning and raising the game on their skillset.
4. Focus On Positioning
Time is the greatest asset that there is.
People who aren’t wealthy spend it swapping time for money mostly. At worst, they swap time for social media.
The wealthy understand that time is a vehicle
Imagine that you wanted to generate a net worth of £1m over the next 10 years. The wealthy minded person knows that saving money alone isn’t going to cut it.
They’d need a vehicle that will accelerate that process, and as such riding the wave of time and compounding.
Positioning their investments in the right environment would be the way to go in order to generate suitable returns.
Investing through the stock market for example is one of the best decisions one can make if they’re thinking long term.
Choosing environments that minimise investments fees over time, is yet another way to ensure money gets to work best.
5. Club Together
Wealthy people typically collaborate more or go into joint ventures together and pull funds for major projects.
Even if they don’t do a JV in the way it is normally understood, they’d do it as part of a formal structure of pooled funds.
A good example of this is how the rich get richer by pooling funds to make venture capital and private equity deals.
By doing this, they play a totally different game and can access companies that are not even in the public domain.
Again, this requires a mindset of thinking beyond trying to make money as a one man band.
The above is another way in which leverage is used by the wealthy to create value they’d ordinarily have no access to.
I’ve come across people who have £1,000 in their bank account and upon reading an article or listening to a friend, commit the majority of the £1,000 to one investment they know little about.
On the other hand, there are people worth £100m who will go through a great deal of due diligence before committing £1m to an investment.
Why the big difference in approach?
Education around being able to assess risk and return is one reason why.
This in turn points to the necessary principle of diversification, which most people who aren’t wealthy do not consider.
Rather than own one business and live life from the proceeds, a wealthy minded person would much rather reinvest some of the proceeds in other assets as way of reducing risk.
7. Think Long Term
Everyone wants to be rich, but no one is prepared to wait for it to happen.
Get rich quick schemes continue to grow in popularity and lottery tickets continue to be sold in the millions.
Wealthy people think long term and as such, spend more time assessing investment opportunities before they commit to them.
To give you an idea, a typical high net worth individual who invests in a company they expect to triple their money on, would stick with it for 5 – 7 years.
Thinking long term is necessary for making the right asset allocation decisions, whilst ensuring that wealth creation is sustainable.
By thinking long term, the wealthy also think of the next generation and hire the best people in order to plan for wealth transfer to their children.
Becoming wealthy is a process and takes time. It requires both the application of improving skill sets and mindsets.
If you’re starting small today, there is no reason why you can’t apply most of these principles today.
You’d probably have to take more risks, but provided these are well considered, you’ll get richer as time passes.
The key is to remember that wealth creation is nothing new. It’s a process and that process can be learned and used by anyone that’s patient and keen to acquire knowledge.
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How have the wealthy people you’ve come across got to where they are? Any wealth creation strategies to share?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.