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This post was originally published February 17, 2017. Here is the new and improved version!

The Secret Behind How the Rich Get Richer

You’ve heard the phrase “the rich get richer”, right? It’s usually accompanied by a sigh and a little shake of the head at how jacked up our income-gap-society is. Today we’re going to look more closely at how the rich get richer. And how you can use the same strategies to become one of the rich getting richer (without trading in any morals or ethics!).

First thing to point out: anyone in our capitalist, opportunity-driven-society can get rich. Yup, this includes you 🙂 You don’t have to be born with a trust fund to learn how the rich get richer and make it work for you.

Thomas J. Stanley wrote a fascinating book called The Millionaire Next Door to show that anyone can be a Millionaire. His book chronicles stories of normal, middle-class people with average, or even below average, income. Some came from middle-class families, some came from poverty. But they all grew their net worth to over a million dollars through smart-but-simple saving and investing plans.

We’re going to share these plans with you so you can get on your way to your million(s):

• Phase 1: Get Rich
  • Learn to Pay Down Debt and Save
• Phase 2: Get Richer!
  • Take Advantage of Compound Interest and Spend Smarter

 

Phase 1: Get Rich

The first phase of your Rich-Get-Richer money strategy is to get rich.

Obviously, this isn’t going to happen overnight. Settle in for the long-game, people. We’re building wealth here! And that takes time.

Step 1: Pay down “Bad Debt”

Not all debt is created equal. We tend to think of debt as a bad thing. And it can be, but we forget (or never learn) that some debt can be really smart!

I, for example, am currently $800,000 in debt, and I’m totally fine with it! Generally, it’s good debt if the interest rate is reasonable (like under 6%) and the thing you’re buying will get more valuable with time. We’ll talk about this more in Phase 2 of this post, but think home loans as an example of good debt.

But credit card debt and car loans…these are bad debt. And we tend to have huge amounts of bad debt! Clearly, you can’t make these disappear immediately, especially with American Household credit cards averaging $16,061 and auto loans averaging $28,535 (source). But you need to have a solid plan for paying them off. If you haven’t already read How to be Debt-Free 13 Years Sooner and Save $38,600 in the Process, check it out to learn how to pay down your debts faster and cheaper!

What about student loans? We all hate student loans, but most of the time, they fall into the good debt category. Because student loans are the only way most of us can afford a college education. And that college education will help us make more money over the course of our careers. So as long as you’re not taking out more than you’ll be able to comfortably repay, student loans are smart. Just look for ways to save on college before jumping into your student loans.

Oh, and for goodness sake, once you’re out of bad debt, try to stay out of that hole! If you use a credit card for the rewards, pay it off in full every month. And if you can drive your car after your last payment’s been made…woohoo! You can save like $300-$500 every month!

Step 2: Save!

If you read The 3 Accounts You Need to Grow Your Savings, you know how much to save and what to do with those savings. Quick refresher for easy-reference:

1. Emergency Savings: 5% of your paycheck until you have 3-6 months of living expenses saved for emergencies only. Kept in a savings account so you can get to it when you need it.
2. Retirement Savings: aim for the IRA maximum, $5,500/year ($458.33/month) until you retire. If $458.33/month is too steep, start NOW with 5-7% of your paycheck and increase your percentage over the next couple years. Kept in a 401(k), IRA, or Roth IRA so it’s completely inaccessible until you retire (I mean, the penalties for taking money out of your retirement account early is enough to make sure I won’t touch the money before retirement!).
3. Dream Savings: Any amount you want, but recommended 5% of every paycheck. Can be kept in almost any kind of account. For simplicity’s sake, we recommend a money market account or CD’s, depending on how long you have until you plan to use the money.

And if you read Fool-Proofing Savings for Guaranteed Financial Success, you know you need to put all of this saving on auto-pilot so you literally can’t mess it up! Even when you don’t have the willpower to keep saving all that money you so badly want to be spending.

Phase 2: Get Richer!

Phase 2 actually starts automatically while you’re still in Phase 1. If you’re investing your retirement account money and dream savings, your money will start to make more money of its own. Let’s look at this more closely, shall we?

Step 1: Take Advantage of Compound Interest

If you read The $831,751 Reason to Save for Retirement While You’re Young and Broke, you know the trick to growing savings is to start early. Like TODAY so you can take advantage of compound interest.

What is compound interest? Ok, you’ve heard of interest right? When you save money in a savings account, you earn a tiny amount of money (like 1-2%). That’s interest. It’s when your money makes its own money without you doing anything.

And when you invest in more sophisticated investments (like Index Funds), you make way more than 1-2%. Over time, you can make more like 7-10%. So your money grows faster. Then with compound interest, not only do you make money on your money, but you also make money on that money your money just made. And that’s how you turn $220,000 into $983,000.

See now how the rich get richer? Because they have money making its own money, which then makes its own money! It’s magical.

Step 2: Buy Assets, NOT Liabilities

Now we get to the real secret of how the rich get richer: buy assets, not liabilities.

In Rich Dad’s Guide to Investing, Robert T. Kiyosaki points out that most people spend nearly all of their money on buying liabilities – things that don’t ever grow more valuable.

• Cars: they lose value the moment you drive them off the lot
• The latest technology: it’s awesome, but loses value immediately because newer technology will be available next month
• Home furnishings: we all want to impress our friends, but styles change every few years, so we’re stuck in an endless cycle of buy, use for a short time, trash.

Kiyosaki argues that we should be spending more of our money on assets – things that grow more valuable or bring in cash.

• Property: it generally grows more valuable, and if you rent it out, you have cash coming in every month
• Annuities: you pay some money upfront to buy the annuity, and you get paid a lump sum every year. Lifetime annuities pay you every year for the rest of your life (leave a comment if you want to learn more about annuities)
• Bonds: you buy a bond (usually from the government or a municipality), and they agree to pay you back plus interest at a certain time (so it’s more valuable over time)

But of course, we NEED transportation, technology, and furniture. So what do we do?

Solution 1: Limit your spending on liabilities so you have more money to spend on assets.

Free up money to purchase assets by limiting your liability spending. Buy a used certified pre-owned car or use cost-effective public transportation. Use last season’s technology, which has about 95% of the current tech’s capabilities at about half the cost! And use classic, not trendy, home furnishings, which, btw, can be found for pennies on the dollar on Craig’s List or at a garage sale.

The more you save on liabilities, the more you can spend on assets. And the more assets you buy, the richer you get because your assets are always bringing you more money!

Solution 2: Buy assets that will pay for your liabilities

Once you really start getting richer, you can use this genius hack to continue getting richer.

Instead of buying a liability, Kiyosaki will buy an asset that will generate enough money to pay for the liability (often with generated money left over!). Like, dude doesn’t just go buy a car. He buys real estate that will generate enough money to pay for his car. Let that sink in a sec. It’s brilliant!

But how does he buy the real estate? He leverages good debt. Think about this: the bank is willing to lend you money at a low interest rate to buy real estate (good debt). You can rent out the real estate so the renter is paying off the loan for you with enough extra so you have enough coming in each month to pay for the car. PLUS the real estate is appreciating (getting more valuable with time) like real estate does, so when you sell it, you’re making more money! Win, Win, Win! Learn more about making money with real estate and figure out how to buy your first investment property.

Oh, and when you’re ready, here are the best books on real estate investing to help you build your real estate fortune.

STEP 3: LEVERAGE TRADES

The final step is to leverage trades to get even greater returns. This way, you can make your money work even harder, even if you have limited funds. 

Take a look at some of the returns that beginner forex traders can make. Typically, they aren’t investing with their own money. Instead, they are taking funds that the market isn’t willing to gamble and then funneling them through trades that put them at good odds of winning. 

This approach can speed up the rate at which you acquire new assets so long as you know what you are doing.

The richer you get, the more assets you can afford, which will make you richer, which will let you afford more assets. Which will make you richer, which will let you afford more assets, which will make you richer, which will let you afford more assets…

And that’s how the rich get richer…

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