The internet is full of people claiming they have found the magic formula for becoming rich. To be clear, I’m not one of them. Of course there is no simple recipe. If it would be that easy, everyone would be rich (and by law of nature, that’s not possible). But still I think there are identifiable behavioral patterns, core characteristics, principles,… that are to a large extent common for people who have reached financial independency. To be clear, I do not have scientific proof for the statements I will make in this blog post. These statements are merely based on observations and personal interpretations. I did not reinvent the wheel in this blog post. Most of the information you will read here can probably also be found somewhere else. But still I think listing these may add some value to your life.
To make things accessible for you, the reader, I ordered my analysis and thoughts into several, rather general, principles that I think are common for most who have succeeded in becoming financially independent. Don’t see them as seperate entities. Most of them are interrelated and probably all have to be put in practice together to increase your chance of making your own fortune.
1. A clear understanding of what money actually is.
I start off with a principle that is probably one of the most important. Wealthy people all have a clear understanding of what money actually is. It may be counterintuitive, but for most wealthy individuals money is not a goal in itself. The rich are to a large extent indifferent to money. For them, money is the by-product of success and a tool to increase wealth at the same time. They have no feeling towards money as they understand that money has no feeling about them too. They see money simply the way it is: a medium of exchange.
Having no feelings towards money does not mean they don’t value or respect it. Of course most wealthy people like being wealthy, that’s not the point. They simply have a clear view of what money actually is. The fact that they untie their emotions and expectations from money itself simply gives them a great advantage that relates to some of the statements below.
This also indicates that viewing money as the solution for personal problems is wrong. Money indeed does not make you happy. Here I think people mix up cause and effect. Actually it is the other way around. In order to become wealthy, people will have to sort out all of their other problems.
2. Wealthy people think for themselves.
It may seem logical, but many people who aspire to become rich don’t actually live by this principle. It basically says that if you live the life of the average person, you will become that person. Don’t expect becoming wealthy by not doing things differently. This also assumes that you need some confidence to do things your way and sometimes take very unique and often ‘strange’ decisions. Warren Buffett called it ‘having an inner scorecard’.
For most people this is actually pretty hard to achieve. We are all born in a system where everyone ‘pushes’ everyone to do things their way. Herd behaviour is an important reason for keeping the status quo. While it served us well during almost the entire history of mankind, it is not so beneficial if one wants to become wealthy. Simply take a look at parental behaviour. Most parents want the best for their children. They want them to be save, they protect them in every way they can. In their blind love they can’t assess risks properly and to make things ‘worse’, children want to live up to their expectations and make their parents proud. Another example is the schooling system. Don’t expect teachers to learn you how to become rich. Teachers are all part of the same system that produces much of the same. Both examples show that most people are stuck in vicious circles and to become wealthy, they simply have to get out of them.
3. Learn and work smart.
Unless one has inherited his wealth, which is not the subject of this post, almost everyone who has achieved financial indepency simply has learned at worked smart at some point. Note that I deliberately say smart, and not hard. Don’t expect money coming to you being lazy. Wealthy people understand that they constantly have to improve themselves in order to stay ahead and to keep having an edge. Probably passion in a certain area may help to live up to this principle, but I don’t think it is a premise for success.
Most wealthy people try to indentify their talents (and weaknesses) pretty soon in their lives. When they identified them, they elaborate on them in order to maximize their potential. They don’t try to push things and be good at everything and in most cases surround them with people who can make up for their weaknesses.
4. Assess and take risk properly.
Most people assess risk the wrong way and in many cases are even afraid to take it. Let there be no doubt: to become rich one has to take certain risks. To assess risk, the down and upside has to be analyzed properly. This is where many people get it wrong. One very profound example is quitting a job. Most people are afraid of quitting their job because they have the believe they will lose a lot of money in the future. Well, let’s assess the risk here. The potential downside indeed is that person earning nothing in the future. However, it’s probably more likely that the next job or adventure will earn that person close to what he earns today. But what people forget in that situation is that the potential upside is, well, all the money in the world…
5. Understand the difference between assets and liabilities.
Wealthy people all seem to understand very well what is the difference between assets and liabilities. In short, assets are anything tangible or intangible that can be owned or controlled to produce value in the future. A liability also can be something tangible or intangible, but that actually costs money to the owner. It’s pretty obvious that wealthy people aim to own as much assets as possible, and try to minimize holding liabilities.
Most people mix up assets and liabilities and this has profound consequences. It’s not very easy, because in one situation something might be an asset while in another situation it can be a liability. For example, owning a car to deliver packages door to door is an asset to the owner. But for another person that uses that car to do weekend trips it is a clear liability.
A remarkable example where many people get it wrong (with profound consequences) is ownership of a house. Many people think that taking out a mortgage and attaching it to a house is an asset, while actually it is a clear liability. A house one lives in himself does not pay the owner anything, actually it costs him a monthly mortgage payment, taxes, insurance, maintaining costs,… So it is basically one of the greatest liabilities most people take on in their lives.
6. Save, save, save!
Now everyone knows the difference between assets and liabilities, the next step is obvious: in order to become wealthy people have to save everything they can. Every dollar spend on trips, cars, clothes,… cannot be invested in assets. Living well below the means is an absolute necessity. It’s the pitfall of the entire system. People have the tendency to tie their lifestyle to their monthly income. What comes in, immediately goes out to all kinds of liabilities.
In this category we can also put all sorts of private debts (mortgages, credit card debts,…). It’s simple: don’t go down that road. Paying interest to buy stuff one can’t afford at that moment is the one way road to being poor.
7. Embrace the power of compound interest.
Actually Einstein called it ‘the eighth wonder of the world‘ because of its huge power and implications. Basically every person that has become rich in his life has probably used it in one way or another. Compound interest simply means that an interest is earned on the initial investment and that instead of taking the interest out it is reinvested together with the initital investment. This creates an exponential growth of capital as shown in the image below.
One example to show the power of compound interest. How much would an investment of $ 10.000 be worth, leaving it untouched for 30 years, with an interest of 1 % a month? Well, it would be a whopping $ 359.496.
The above example also shows that patience is a great virtue if you want to become rich. Wanting to become rich overnight will make you do foolish things. Compound interest only delivers over a longer time frame.
Maybe after reading this you might have the impression it’s not so easy to become wealthy, or you might start your journey to financial freedom. I don’t know. What I know is that there is no clear set of rules and that you will have to be flexible in your thinking process. Probably there will be some bumps on the road as others will simply not hand their money over to you. You will have to earn it. Remember that optimism is important: there are certainly a million ways to make a million dollars and you only have to find one to succeed.
I will certainly elaborate further on this post in the future as insights might change, so every feedback is absolutely welcome!