Standard of living of millionaires is what attracts us the most. Millionaires have lots of excess money. But the way they lead their lives attracts us the most. It will not be wrong to say that “we want to copy their lifestyles”. We carry this fantasy of becoming rich. If I happen to meet a millionaire, what I ask? Sometime back, I met one and I was impressed.
People often think only about how to get rich, this is a mistake. They eventually end up losing all steam. How to get ‘richer’ is a relative therm. If asked to Buffett about his ways of becoming richer, his methods will be different. When you will ask me how I plan to get richer, my way will be different than Buffett :).
Important is to find a right way for self. Every individual will have their own way to get richer. Yes, procedure to become rich cannot be manufactured in bulk. Instead, it is a tailor made thing for every individual. To find ones right way, one must first answer how rich get richer.
Importance of Alternative Source of Income
Records say that Personnel Income Tax collected in year 2009-10 was approx Rs. 1,32,833 crores. In year 2010-11 it was approx Rs.1,47,560 crores. In year 2012-12 is was approx Rs. 1,70,788 crores. In three years (2009-2012) personal tax collection has increased @ 8.7% per annum. Important point to note is, government will continue to tax us more.
What makes rich richer is their source of income. Salary is taxed more. Other source of income is taxed less. It is rich people alternative source of income that makes them get richer day after day. When we compare the source of income of rich with a common man, the result is like this:
|1||Income from Job||90%||5%|
|2||Interest Income (rental income, interest on term deposits etc)||5%||45%|
|4||Partnership in Business||0%||20%|
|5||Capital Gains (Property, stocks, etc)||2%||20%|
Rich People are Taxed Differently than Us…
The possibility of getting rich is deeply connected with the way we are taxed. When we see the income tax collection figures, it highlights from where the rich are making money. When we look into it deeply we will know rich are managing to pay less tax. Income from job (salary) is taxed the most.
Unfortunately this is the tax policy followed all over the world. Salaried class is taxed the most and rich are taxed less. This is why rich people make less money from salary. Rich make rely more on other investment options. In other income options, tax policies are less stringent. They can afford to retain more money than a common man.
Some Facts and Figures of How Rich Get Richer…
- Wealth of Rich are Ever on Increase
- Wealth of Middle Class is almost stagnant
- Rich people have several income generating sources
- Middle class is too dependent on salary
- Rich are more focused and disciplined investor. They earn high returns
- Middle class are inconsistent investors. They make loss in investing.
- Rich people buy better performing investment
- Middle class buy without knowing which is better performing investment
- The wealth gap between Rich & Middle Class is increasing year after year
- Rich invests 75% of their income to buy income generating assets
- Middle class ties 50% of their income into paying back Loan
- Average return on investment of rich is approx. 5.9%
- Average return on investment of middle class is approx. 3.2%
- Rich invests in stocks and make more profit
- Middle class are a more scared lot when comes to stock investing
- Rich people loves starting their own business
- Middle class is more dependent on their slary
- Rich people invests more in commercial real estate
- Middle class invests more in residential real estate
- Rich people buy more assets during bad times
- Middle class sell and escape market during bad times
- Rich like investing in convertible bonds
- Rich like private equity and hedge funds as their investment vehicle
How Government Tax Cuts are Handled…
We all wait for annual budgets and expects heavy tax exemptions from government. More often than not, government do provide us tax exemptions. But the way we handle tax is what makes us rich. Rich people use this tax exemption to save more. We use tax cuts to increase our spending’s.
On one side where rich’s focus is to buy more income generating assets, we focus on accumulating debs. Government give us tax cuts to boost economic growth. But we simple waste our money on needless spending’s. If we can invest our money like rich, not only we will become like them but also will contribute in nations growth.
How Rich Get Richer > Observations…
- Rich has their investment goals clearly spelt out.
- Rich start investing early & they stay invested for long term.
- Rich practicing systematic investing. They automate their investing process.
- Rich invest their money for financial independence.
- Rich never carry credit card debt.
- Rich never take personal loans.
- Rich use property loans but make sure that its paid back fast.
- Rich people lives a frugal life.
- Rich avoid overspending. Middle class overspends as they cannot resist temptations.
- Rich keep improving their financial intelligence.
- Rich keep their investment portfolio well diversified.
Your income from job cannot make you rich. If you are thinking to put your money in only risk free investment options then also you have less chances to getting rich. Developing streams of dividend income is a good starting point. But rich do rely on them along with other options as well. Rich people rely more on business ventures to build the source of income. But above all, capital gains on investment is how rich get richer. For a common man it is essential to save and invest money with objective of good capital gains. Investing money on riskier options is the only ways that can assure substantial wealth creation within ones lifetime. When we are saying investing in riskier options, it means equity and staying invested for longer term. It means we have to start investing from today and not tomorrow. The more time you give your money to stay invested (in riskier options) the probability of making bigger capital gains becomes higher.
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