• samsivarajan

Key Lessons from the Wealthy


We have this love-hate relationship with our 1% - the really wealthy individuals that we see on television or read about. We celebrate their successes publicly but privately many are resentful and wonder what lucky genetic lottery or Lotto did they win?


In over 25 years of working with really wealthy individuals in Canada, Europe and Asia, the evidence I have seen suggests that the overnight success stories we read about actually took decades. I remember working with one Canadian billionaire, a household name. He told me that he had mortgaged his family home many times, was unable to pay his bills and flirted with bankruptcy for the first twenty years of his company. So much for overnight success!


So, what can we learn from the wealthy?



Save - Duh! This sounds easy in theory but hard to do in practice. Or is it? Research suggests otherwise. In one study, moviegoers were provided free popcorn in a medium or large bucket to see how much they ate. The thing is that the popcorn was old and stale. But, people ate 30% more bad popcorn when they were given the large buckets. Just like we eat mindlessly, many of us spend mindlessly. Automatically saving $50 or $100 from each paycheck is easier than it sounds for most of us and pretty soon you adjust your lifestyle to lower spending. New apps are on the market that allow individuals to round up their spending and put the difference into savings accounts. Most of the wealthy I know have had the discipline to manage their spending to focus on what they really wanted. One billionaire I worked with only flew economy even though she could have easily afforded first class – she had better use for her money.



Invest in yourself – Warren Buffett, Mark Cuban and other billionaires have one thing in common. They each read more than 3 hours a day. This investment in themselves has paid off handsomely. In his book “Outliers”, Malcolm Gladwell wrote about 10,000 hours of practice needed to develop expertise and the success that follows. The wealthy individuals I worked with invested in themselves – whether in going to school, learning their craft from the ground up or plowing all of their free time into their product or company. Our personal human capital is still the greatest source of wealth for each and every one of us.



Ignore the noise – we all remember the children’s story of Chicken Little and how a little acorn falling on her head made her think the sky was falling. She then spread the panic among her friends. This happens all the time when it comes to investors’ savings and investing habits. When the results of the Brexit referendum were announced in June 2016, the UK stock market fell 8% when markets opened. But the UK stock market still generated 14% returns in 2016 and 16% returns in 2017. When Donald Trump defied the pundits and was elected as President of the United States in 2016, many predicted a US bear market. However, the US stock market was up over 30% in the months after his shock election victory. Wealthy individuals have a long-term plan – whether it is with respect to their business or their investment portfolio – and they simply ignore the daily noise.


The power of compounding – Albert Einstein once said “compound interest is the eighth

wonder of the world. He who understands it, earns it ... he who doesn't ... pays it”. Wealthy individuals understand it and that is one source of their wealth. Look at a simple example below of an individual hoping to accumulate $480,000 in retirement savings by age 65. If she starts at age 25, saving $250 a month, she could achieve her goal with an investment portfolio that generates 6% a year. Wait 10 years, however, and she would either have to double her monthly savings (to $490 - Option 2) or invest more aggressively (and seek 9.6% a year - Option 1). If she waits until age 45 to start saving, the amount she needs to save every month would double again (to $1,052 - Option 2) or she would need to be even more aggressive (and need 12.5% return a year - Option 1). If you use the power of compounding to your advantage, you can afford to save less money and invest more conservatively.


 

Age 25

Age 35

Age 45

Option 1

  • Save $250 a month until age 65

  • Invest @ 6% a year

  • Save $250 a month until age 65

  • Invest @ 9.6% a year

  • Save $250 a month until age 65

  • Invest @ 12.5% a year

Option 2

  • Save $490 a month until age 65

  • Invest @ 6% a year

  • Save $1,052 a month until age 65

  • Invest @ 6% a year

Author’s calculations.
 

There really is no magic bullet or lottery that the wealthy have used to grow their net worth. Just some simple rules that they follow with consistency and discipline.


The good news for the rest of us? Those same rules will work just as well, and just as easily, for each of us.


For more lessons, check out my best-selling book Making Your Money Work: The Secrets to Financial Health


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