Lesson 1: Seeing the real impact of each purchase
Each year, Forbes magazine puts out a list of the world’s billionaires. Sometimes they are ranked by net worth, sometimes by industry, and sometimes by age. When you look at this list, you might ask yourself how these people made so much money in just one lifetime. It can be easy to think that so much success must be the result of some dirty little secret. Like maybe those billionaires have broken laws, stepped on hundreds of people on their climb to the top, or were just plain lucky.
Well, there surely are billionaires who were lucky, unscrupulous, or cruel. Some of them may simply have been born into the right family and inherited their wealth. But a large number of billionaires today (somewhere around 2/3 of them) are actually self-made. In other words, they have managed to generate a huge amount of wealth in just one lifetime. And most of them did so without breaking any laws or violating their ethics. So how do rich people get so rich?
Rich people look at money differently than most other Americans do. Instead of seeing each dollar as being worth just one hundred pennies, they try to imagine how much each dollar could make them if invested correctly. They spend each dollar with that in mind and try to see each purchase in that context. For example, instead of going out and spending $75,000 on a new sailboat with the money they have earned at their jobs, the rich try to determine the impact that such a purchase would really have. A decent investment might bring up to a 25% return. So that means that $75,000 (if properly invested) could really equal $93,750 in the investor’s pocket. And if that $93,750 was reinvested into another asset with a 25% return, then that could equal over $117,000 in the investor’s pocket. Within a short time, the money could be doubled, tripled, or quadrupled.
The rich don’t just see the money that they spend on each purchase: they try to see how much that money could have made them if invested properly. Spending hard-earned money on a big purchase now often means losing lots of potential profits downs the road: maybe even enough to buy ten sailboats!
The world’s billionaires have learned to see the real impact of every purchase that they make. As a result, they wisely decide to use their active income (from their jobs) to buy assets, and then let those assets buy them their toys. If you can imitate this way of valuing your purchases, then you will go a long way towards reaching all your financial goals.