The moment you start thinking about the rich becoming richer, terms such as wealth management, prudent investments, stock market investments, finances, and rising incomes come to the mind. The disparities in incomes and wealth which lead to the classifications like rich, poor and middle class also come to the mind. You are also likely to think of the various reasons for these disparities in income and wealth distribution in the economy.
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The gap between the rich and the poor
A wide gap in the incomes of the rich and the poor has existed for centuries in different countries of the world. The wealth resting with the rich has been much more than the wealth in the hands of the poor. In the United States, close to 40 percent of all wealth is held by the top 1 percent of the rich people. And almost 90 percent of all wealth is held by the top 10 percent of the people.
Most people who would have ever given a thought to the facts mentioned above and the disparities in incomes and wealth of the two groups of people would have perhaps wondered as to why the rich invariably keep getting richer all the time. Their incomes and their wealth keep on rising. Though there may be some exceptions to the above, it is also true that more often than not, the poor also get poorer with passage of time.
How Rich Become Richer
A lot has been written about the reasons as to why the rich become richer with higher incomes and consequently more wealth in any economy. We shall look at some of the key reasons for the same here:
1. The rich have a knack for recognizing opportunities for making money, increasing their incomes and wealth
The rich see an opportunity in every panic situation in the stock market and also invest in other asset classes when the others are selling out of panic. They acquire these assets at low costs and hold on to sell them at good profits, thereby increasing their incomes and wealth both. Other people often follow the herd mentality and therefore, lose out on opportunities of making money and increasing their income and wealth.
2. The rich never fall in love with their investments, particularly those in the stock market
Very often, people who are holding blue-chip stocks through investments in the stock market or hold prime properties, both of which could have been acquired at much less rates, fall so much in love with their stocks or properties that they refuse to part with them by selling even at fantastic prices and profits. When there is a cyclical downturn, they express regrets over not having utilized the option of exiting at an opportune time. It is said that the stock market does give everyone at least one opportunity to exit the stock market by selling his stocks.
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Whether you have investments in stocks in the stock market or in properties, it is critically important that you exit at the peak of the asset class cycle or thereabouts. Never fall in love with your investments, even if they are rising at a very fast pace. This is particularly applicable to stock market investments in shares, bonds and funds. Proper research and a little foresight will do you a lot of good.
3. The rich invest for the long term in a diversified way
Rich people generally invest for the long term in a diversified way. They are patient with their investments. Such investments yield the following benefits:
- Diversification provides a natural hedging advantage for various investments in multiple asset classes;
- Investing for the long term gives the benefit of compounding;
- Long term investments also provide a protection against cyclical ups and downs in various asset classes, particularly in the stock market;
- Your long term investments can, at times, be complemented by what you do on a day to day basis now so as to yield better returns.
4. The rich often invest in stocks and bonds in the stock market
You will find that rich people often have significant investments in the equity stock market. They invest in selected companies and regularly monitor their investments. Churning of their portfolio is also an essential ingredient of stock market investments. The rich generally operate with a fool-proof stop loss arrangement to keep their losses in the stock market under check.
5. The rich pay as little tax as possible
The rich are always looking at ways, of course legal, to reduce their tax liability. They plan their annual taxes well in advance. They usually set up their income and investments across a mix of taxable, tax-free and tax-deferred accounts. They set up their income generating investments under the latter two accounts to the extent possible.
6. The rich don’t load themselves with unnecessary insurance
Rich people often make substantial savings by cutting out on superfluous insurance. They prefer to save on insurance premium and instead spend on fixing what breaks down. They do have the money to spend on repairs whereas the common man would generally be happy taking appliance insurance, home insurance and additional warranties for electronic items, thereby ending up spending much more than the rich do.
7. The rich constantly educate themselves on financial matters
The rich are better educated on financial matters concerning income streams and wealth creation. Further, they keep on spending money on constantly educating themselves on such issues. So, they are better equipped to manage their incomes and also wealth.
8. The rich tend to live below their means
More often than not, rich people spend less than what they earn as a regular income. So, they have a surplus from their regular income every month, which they invest judiciously. Living below their means adds to their wealth and assets on a regular basis.
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9. The rich don’t ever stop
The rich don’t stop once they achieve their goals. They don’t rest on their laurels and strive to do even better. Instead of stopping and celebrating their success upon reaching a particular level of income or wealth, they set higher goals for themselves and work harder to achieve them.
10. The rich often love to take risks
Rich people know that the only way to become richer is by taking calculated risks for increasing their income and wealth. They hedge their risks to earn more money whereas a common man simply avoids taking any risks with his hard earned money.
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The rich tend to become richer by doing things that the common man is not willing to do, some of which have been mentioned above. The rich are constantly looking for ways to increase their income and wealth and are ever prepared to act on them.
Video: How Rich Become Richer
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