How the rich got rich
A research on how the top 400 rich people in US made their money makes interesting reading. The data spanning a period of 1992-2007 showed that the richest 400 in the US made their money though:
• Wages and salaries: 8.6%
• Interest: 6.6%
• Dividends: 13%
• Partnerships and corporations: 19.9%
• Capital gains: 45.8%
So what does it mean – I believe it means that:
1. Working for a salary won’t make you rich –this is true as much in India as it is in the US –Most of us look at salary to become rich and that is the first wrong assumption. We all need to create multiple passive incomes.
2. Making “Safe” investments in debt based instruments won’t make you rich either –inflation and taxes eat up whatever you may make out of debt instruments like fixed deposits. So interest income will not make you rich -but one should have a part of their portfolio in these instruments just so that there is some safe capital.
3. Investing only in large companies also won’t make you rich – we in India mostly invest in large companies through the equity route. In the US, the investors search for the next multi-bagger – a small company today that will grow into a large company in the future.
4. In the US owning a business or businesses (fully on in part) seems to help people get rich as 2/3rd of their money came from this route. Remember that US is full of small businesses.
In India, I believe, for getting into the top 400 richest – one has to follow a similar path with one small additional option –
• invest in yourself,
• grow your knowledge and experience,
• take risks in equity (large and mid cap) and in real estate (this is the additional option in India); and
• build a financial windfall through investing in companies that would be future stars (the venture capital route).
If you do not want to be in the top 400 richest in India – but still want to be reasonably rich, then you can
1. invest in yourself,
2. grow your knowledge and experience and
3. take risks in equity and in real estate
How to become a smarter investor
So here are some thoughts on “How to become a smarter investor ”.
1. Visualise Financial freedom – We all agree that achieving financial freedom can change our lives. So visualise your life once you are financially free. What will you do from 6 am till 10 pm? How you will spend seven days a week when you are financially free? What are the projects that you will pursue once you do not need a job to live your life? I want you to list all the things that you have always wanted to do – but did not do due to time and money constraints. Visualising how your life will change once you achieve financial freedom is really the first step towards becoming a better investor.
2. What do you invest your time on? The rich people continually invest their time in educating themselves to become better investors. They invest time and effort in getting clarity in their mind on their long term goals – over time, they know exactly what they want. They put time and effort in building networks with like minded people. It is thisfinancial education, clarity of mind and networks that make them rich over time. So these are the three areas where you will need to work on.
3. Getting rich is not magic or luck – it is 10 year project. Anyone can become rich. All it needs is to break this large 10 year project to 10 smaller yearly projects. Take one project every year and just do it. Over time you will reach your goal of financial freedom. So while the world may think that you are lucky – you know that you have worked for it – you know that you have invested your time and effort and over time reached the goal of financial freedom.
4. Where do I start? Here’s what you need to do:
a. If you have not done it already – start by visualising how your life will change once you are financially free –this is required to motivate oneself over the next few years to sacrifice your today for a better tomorrow.
b. Make a long term financial plan – I have a 20 year financial planning template that I can share. It is explained in detail in the book. With the help of the book and the template, you can make a GET RICH PLAN for yourself.
c. Commit two hours every week for improving your financial education, clarity of mind and networks -these are the things that will make you rich over time.
d. Break the long term plan to annual plans and take one step at a time – measure the current ROI on your investments and work towards increasing your ROI over 2-3 years to 15% per annum (post tax)
e. Over 3-5 years, you will see that you are a smarter investor and you can clearly see that you are getting closer to financial freedom every year.
Remember life is a vacation once you achieve financial freedom– all seven days a week you are on vacation. You can chose to do what you want and refuse what you do not want.
Now that is surely something worth working for – don’t you agree?