Why Rich People Are Rich

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Corth
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Why Rich People Are Rich

Postby Corth » Sat Dec 06, 2008 6:43 pm

You knew somebody was going to have to make this thread :)

Link!
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth

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Re: Why Rich People Are Rich

Postby Kifle » Sat Dec 06, 2008 7:10 pm

Because they're born into it?
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Re: Why Rich People Are Rich

Postby Corth » Sat Dec 06, 2008 7:52 pm

According to that profile, 91% are self-made.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Tasan
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Re: Why Rich People Are Rich

Postby Tasan » Sat Dec 06, 2008 10:23 pm

That's not an accurate statement, Gene.

It said that 91% never received any monetary help, via family, in starting their business.

I love how it says they live well below their means at 80-100k per year. Obviously, if you are building worth, you don't SPEND every dime you get. Everyone who passed 6th grade knows that. Also, this isn't new information... you don't hear about the quietly wealthy because there are far too many of them to make it much of a big deal.

If you work for 37 years(57-20), and you save 2000 per year, at modest interest rates, you'll have close to 100,000.

These people are saving(at least) 10x that(or so the report says)... makes complete sense.

Hell, my parents own two properties outright and are within 5 years of owning another, they have stock from 30 years of being with the same company(that stock like everything else has been devalued of late, but it's still money). Only one of them is even 50 and both could retire right now.

It's the ultra-rich that you end up hearing stupid stories about how they shot themselves in the leg.

Edit: I guess it depends on your definition of "self-made".
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Re: Why Rich People Are Rich

Postby Lathander » Sat Dec 06, 2008 10:44 pm

This is one of Richard Russell's articles that can be found on www.dowtheoryletters.com called Rich Man, Poor Man.

MAKING MONEY: The most popular piece I've published in 40 years of writing these Letters was entitled, "Rich Man, Poor Man." I have had dozens of requests to run this piece again or for permission to reprint it for various business organizations.

Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline and desire. I say, "for the great majority of people" because if you're a Steven Spielberg or a Bill Gates you don't have to know about the Dow or the markets or about yields or price/earnings ratios. You're a phenomenon in your own field, and you're going to make big money as a by-product of your talent and ability. But this kind of genius is rare.

For the average investor, you and me, we're not geniuses so we have to have a financial plan. In view of this, I offer below a few items that we must be aware of if we are serious about making money.

Rule 1: Compounding: One of the most important lessons for living in the modern world is that to survive you've got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation -- and money. When I taught my kids about money, the first thing I taught them was the use of the "money bible." What's the money bible? Simple, it's a volume of the compounding interest tables.

Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious -- compounding may involve sacrifice (you can't spend it and still save it). Second, compounding is boring -- b-o-r-i-n-g. Or I should say it's boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions -- he's finished.

A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he's 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A's 33 additional contributions.

This is a study that I suggest you show to your kids. It's a study I've lived by, and I can tell you, "It works." You can work your compounding with muni-bonds, with a good money market fund, with T-bills or say with five-year T-notes.



Rule 2: DON'T LOSE MONEY: This may sound naive, but believe me it isn't. If you want to be wealthy, you must not lose money, or I should say must not lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing. Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big time -- in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own business.

RULE 3: RICH MAN, POOR MAN: In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.

The wealthy investor doesn't need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "give away" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.

And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn't mind waiting months or even years for his next investment (they call that patience).

But what about the little guy? This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending 20 bucks a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, "He who understands interest -- earns it. He who doesn't understand interest -- pays it." The little guy is the typical American, and he's deeply in debt.

The little guy is in hock up to his ears. As a result, he's always sweating -- sweating to make payments on his house, his refrigerator, his car or his lawn mower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money -- fast. And he dreams of those "big, juicy mega-bucks." In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down-escalator.

But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.

RULE 4: VALUES: The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. I judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run.










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Re: Why Rich People Are Rich

Postby Corth » Sat Dec 06, 2008 11:42 pm

Interesting article.. though narrowly tailored towards generating wealth through investing. I thought it was an important observation in the profile I linked to that such a high percentage of millionaires own their own business. A million dollars really isn't what it once was but its still a decent benchmark to attempt to distinguish between well off and not well off. And by that definition, most well off people own their own business. Which implies that earned income, rather than just investment income, is a big part of reaching the millionaire milestone.

Perhaps a better way of looking at it is that you need to combine both. You more earned income you have, the more you can invest, which is a great way to create wealth over the long haul

We touched upon this a bit in the 'poor' thread. Living below your means certainly will not make anyone rich. But over time, it can make you a millionaire.

For instance.. I found a Savings Growth Calculator on the internet and played around with some numbers.

If I were to save $425 per month, and get a return on that money of an average of 8%, which is a conservative return based on historical stock market rates of appreciation, by the time I turned 68 years old (35 years from now), I would have a million bucks. That $425 is basically a car payment. Instead of leasing a new car every few years I drive used cars, and instead of going out 1-2x per week, I go out to eat 2x a month, and thats $425 a month right there.

There are a lot of people that could easily save $425 per month, but they don't. Its a question of priorities. Do you want to buy something that makes you happy now, or do you want to insure that you will be comfortable in the future?

The lesson is that sacrificing, over time, CAN make you well off. Not rich.. but as far as I am concerned, well off is enough.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
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Re: Why Rich People Are Rich

Postby kwirl » Sun Dec 07, 2008 1:09 am

Speaking from the alleys here, but I have a question that you guys probably consider basic. What is the best way to invest money for saving? Savings account? Retirement plan? Stocks? Mutual Funds? Bonds? Securities? In the next year I hope to start seeing positive income (meaning I will make more money than I have debt) and I want to start being smart about saving.

I realize that discipline is a fundamentally essential part of the process, and I hope that I've managed to acquire monetary discipline by living without it for a period of time. Anyhow, constructive response would be awesome, although not entirely expected. Thanks.
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Re: Why Rich People Are Rich

Postby Vaprak » Sun Dec 07, 2008 3:08 am

Daz,

My first advice would be to get to the point where you always have at least $1,000 in your checking account. Do not carry any debt on any credit cards. If you absolutely must use a credit card pay it off every month.

Next save up an emergency expense cushion in some sort of high yield savings account (ING direct, your local bank, whatever). This emergency expense account should have 3-6 months wages in it in good times, but in a period like we're in now get at least enough liquid cash saved up in there so you could live for 6 months if you had to. This fund is only touched if you loose your job or if something like your furnace goes out. Use it to keep yourself from going into debt.

Then, if your employer has a 401k plan invest whatever percentage amount it takes to get whatever the maximum employer match is. Invest it in a balanced growth fund if you're young (under age 40).

Once you're maxing out your 401k, sign up for a Roth IRA. Your best bet for this might be to go directly to a mutual fund company that has cheap index funds available in their Roth IRAs. Fidelity would be one example. Otherwise you can go through a trustworthy financial advisor.

If you're able to build yourself up to the point where you have cash in your checking account, your emergency fund is topped off, you are maxing out your 401k, and you're contributing the maximum amount to your Roth IRA you'll probably be well off by the time you retire. If you've still got cash left over after stashing all this away each year then you can start buying mutual funds or stocks straight out.

*I am not a certified financial planner.
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Re: Why Rich People Are Rich

Postby Kegor » Sun Dec 07, 2008 5:31 pm

Just wanted to spotlight an excellent book on this topic. Rich Dad Poor Dad by Robert T. Kiyosaki with Sharon L. Lechter C.P.A.

This book is a very good read that covers pretty much every aspect of the discussion here. I would highly recommend it to anyone interested in what is being discussed here.
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Re: Why Rich People Are Rich

Postby kwirl » Sun Dec 07, 2008 9:15 pm

Thanks for the constructive and helpful response. Posts and threads like this are the reason I still come to this forum, who knows, one day I might get over my bitterness and return to actually playing. I don't even remember why I'm mad anymore, lol.

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