Wealthy People: This Really is Dumb Finance

Most people know me as a contrarian, but I wanted to address one of the fundamentals about finance that every single wealthy person I know understands and almost every person I speak to who is struggling does not.

And it all starts with perception.

You see, every person struggling with finance usually is because they are living close to, or beyond their means. In effect, they spend almost (or more than) everything they earn.

They buy things so they can own them:

  • Their house
  • Cars
  • Boats
  • Jetskis
  • Caravan

The list goes on… and on.

Just because someone is on a good salary doesn’t mean they’ve broken this cycle either.

More salary, more toys, bigger house etc.

Ever heard the phrase, “keeping up with the Joneses?”

The key here is that they BUY things to OWN them (or in the case of their own home, they are struggling to pay it off as quickly as they can to release them from the burden of repayments).

Wealthy individuals understand the difference between assets and liabilities, and they know how to use leverage and finance to their advantage.

From the outside, the wealthy person has those same toys. The houses, the cars, boats and all the trimmings. But the truth is vastly different. Rarely do they actually own them, nor do they have any interest in owning them.

Furthermore, many of these “wealthy” people earn considerably less from their “jobs” than those who are struggling!

How? Why? So many questions.

So let’s take a look at the three keys wealthy people understand:

Key 1: Rent or Lease Liabilities

Wealthy people know that liabilities, like cars, boats, and other depreciating items, are not great investments. Instead of owning these items outright, they prefer to rent or lease them.

This way, they don’t tie up their capital in things that lose value over time. Plus, they get the benefit of enjoying the latest and greatest without the financial burden of ownership.

Key 2: Control Assets Through Leverage and Finance

Instead of using their cash to buy assets outright, wealthy individuals use leverage (borrowed money) to control more assets.

I chose property as my wealth creation tool, but others might choose business, shares, or a combination of asset classes. The key here is that these assets generate income or appreciate in value, which ultimately helps build wealth.

Key 3: Avoid Rushing to Pay Off Assets

While it might seem counterintuitive, wealthy people often don’t rush to pay off their assets.

In fact, in many cases, not only do they no want to pay off the assets, they want to borrow more against the asset as the equity increases.

They understand that, in some cases, it’s more beneficial to use their cash to invest in other income-generating assets instead of paying down a low-interest debt. This approach allows them to grow their wealth faster and more effectively.

Now, you might be thinking, “How can I apply this mindset to my own financial situation?” To be honest, it’s simple, but the shift in mindset is not easy.

Assess Your Current Assets and Liabilities

Take a good look at your finances and identify which items are assets (income-generating or appreciating) and which are liabilities (depreciating or cost-generating).

This will give you a clearer picture of your financial standing and how you have thought about assets and liabilities up until now.

Focus on Acquiring Assets

Prioritise investing in assets that will grow in value or generate income, such as blue chip property. This is where you will need the help of experts to ensure you are on the right path.

Rethink Your Approach to Liabilities

Consider renting or leasing depreciating items instead of buying them outright. This can free up cash to invest in more assets and help you grow your wealth more effectively.

It’s important to know that as you grow your wealth, you don’t need to give up access to the things you love. You just need to understand what’s most important to you and spend money on the things that actually make you happy, rather than bleeding money on things you never use.

And remember that building wealth is not just about how much money you make, but also about how you manage and grow that money.

For me, I’d much rather leverage $1m invested in Blue Chip property (which puts money in my pocket) than own a boat or a jetski.

Need help getting started or understanding how this would look for you? Chat with our expert strategy team today.

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