It is not easy to build wealth for a common man, but this is also correct that taking only steps will help is building of substantial assets. How rich or poor we are solely depends on how we deal with our money-in-hand. People who are really rich treat their money very differently then we common people. This difference in treatment of money makes them rich. The way they handle their money is worth learning, and if can practice the same money-treatment one day we will also become rich.
When we common people are obsessed with earning abnormal returns (doubling money in one year etc), rich are more subtle and passive. They focus more on beating inflation and then try at least fractional capital appreciation. We common people carry some bad habits that rich try to avoid under all circumstances. In this article we will discuss some practices of rich that has made them build substantial asset for themselves.
Once we open savings bank account with a big bank they render us their services by providing savings account, debit card, credit card, ATM service, online trading account, online banking, bank statements by email etc. These services we enjoy do not come free of cost. Bank does charge fees for providing all these services. I am talking about these fees as an example, in reality there are many other money drains we have created for ourselves. The problem with such money drains is that we do not realize that they exist but slowly and steadily there are actually eating our capital.
This is only one side of the story, interesting is this, why we call rich people rich? They are rich because they are not dependent on their next months pay cheque to pay their bills. Their pay check is acts more as their savings then expense manager. Suppose you need $10 in expense, rich people already has so much capital in their account that it generates $10/month as interest. So every time the paycheque gets credit on their account the interest income increases making them even richer.
But see the difference, we common people add savings in bank account to manage our expenses. Rich add money in their account to increase their interest income which in turn takes care of their expenses. We common people pay the fees of banks to avail the banking facilities, rich people asks the banks to pay them interest which in turn takes care of the feed of banks. So it will not be wrong to say that rich do not pay any fees to banks, instead they first take money from bank and then repay the bank their money.
Rich people get richer by accumulating savings and re-investing the earned interest (at least partially) to generate even higher interest income. Suppose you are generating $100/month in interest. You use $50 to take care of all your monthly expenses and re-invest the balance $50. On one side your income (paycheque) is getting added to your capital and as if this was not enough even you are saving from earned interest and reinvesting it to build even bigger capital. The way rich keeps growing their accumulated capital make the what they are, RICH.
Rich spends less than us. I know you must be thinking that I am kidding, but this is a truth. The proportion of their earnings that their spend is much lower than we common people. Suppose your average monthly income is Rs 100,000 and your average monthly expense Rs 98,000. It means you are almost 100% dependent on your monthly paycheque to manage the expenses as you are spending 98% of your income. Consider a rich person whose monthly expense is Rs 500,000 per month. He has Rs 100,000,000 in fixed deposit which is generating Rs 700,000/month of interest. Though this rich person is spending more than five times as your still he is spending only 71% of his income. He is reinvesting the balance 29% in deposits to generate even higher interest income the next month. Not only the accumulated capital (Rs 10 crore) is growing with reinvestment of income but it is also increasing the corresponding increase in interest income, increasing the rich person’s purchasing power. This process of ever increasing capital of rich makes them rich.
At one point of time, may be this rich person did not had Rs 10 crore as deposit. May be he had only Rs 1 lakhs, but as he was aware about the process of building wealth (increasing deposit and reinvestment of profit) has made him build such a huge wealth for himself.