Tuesday, January 14, 2014

7 factors that differentiate rich people from normal people

The media is filled with images of how a wealthy or rich person lives his or her life. Big houses, big cars, branded goods are what we commonly see. Often, luxurious items are associated with rich people. To the extent, many people pursue all these luxurious items thinking that the more they own all these, the richer they are. Nothing could be further from the truth.

In Singapore, we've heard of the 5Cs. They are Cars, Condominium, Credit Cards, Cash and Country Club. This is again associated with the rich and people believe that owning all these will categorize them as rich people also. However, pursuing all the luxuries of life can instead make a person poorer. A person can be living in a condominium, drive a big car and still be poor. It appears that they are rich on the outside but on the inside, they are actually mounted with huge amounts of debts. This in my opinion is not how a wealthy person is like.


In this post, i'll be listing down 7 factors that differentiate rich people from normal people. What is the true meaning of being rich and how you can be happy being rich? Have you heard from your parents that rich people have many troubles and that being rich is not a good thing after all? This is true only for the "fake" rich. The "real" rich are happy and contented with what they have.

There's a book titled: "The millionaire next door". In this book, the authors had done extensive research on the majority of rich people in America. In this case, the rich people are defined as having a net worth of more than US$1 Million. What they found out was a surprise to many. Most of the millionaire households that they profiled did not have the extravagant lifestyles that most people would assume.  This finding is backed up by surveys indicating how little these millionaire households have spent on such things as cars, watches, suits, and other luxury products/services. How these people manage to accumulate so much wealth is discussed in this book also. Here, i'll discuss 7 factors that made these people rich.



So here are the 7 factors:


1) They live below their means

This is what we've heard before. You might have heard it many times and know what it means. However, it is important to practice it. Rich people are frugal and live below their means. They save a huge part of their income and live a simple life. This is true for Americans and also true for Singaporeans.



Simply said, living below your means is spending less than you earn. 3 questions that were asked to these millionaires in the book were

1. Are your parents frugal?
The answer is yes.

2. Are you frugal?
The answer is yes.

3. Is your spouse frugal?
The answer is also yes.

It seems like the whole family is frugal. Frugality runs in the household and this is one of the factors that made them rich. However, being frugal alone will not make you rich. That's when the next factor comes in.



2) They invest their time, effort and money

Rich people like to learn. They invest a lot of their time reading, learning from others, upgrading their skills etc. It is stated that the wealthy people spend on average 8.4 hours a month on wealth accumulation and their investment strategies. On the other hand, normal people spend only 4.6 hours a month on wealth accumulation.

There's an interesting fact that was mentioned in the book. It was said that wealthy people go out and earn income early and fast. This means they start working early and do not spend too much time in school. In fact, the authors shared why they were not rich. They said they had spend too much time in school with an average of 10 years in University. For a person who has started working 10 years earlier than you, it is impossible to catch up with his earning capacity unless of course they are able to earn an extraordinary high income from being an entrepreneur.



Wealthy people use at least 15% of their income for investment. They are also interested in the value that they get when they spend their money. They will know where their money is spent on and keep track of their expenses. In the case of a car, wealthy people know that if money is spent on a car, the value of the car depreciates in the first 3 years.

Lastly, the book mentioned they asked 3 questions to the wealthy as well as normal people:

1. I spend a lot of time to plan for my financial future
2. Usually i have sufficient time to handle my investments properly
3. When it comes to the allocation of my time, i place the management of my assets before my other activities.

The interesting thing is this:
Wealthy people agree to all three statements while normal people disagree to all the three statements.



3) They value financial independence more than social status

Cars are often associated with social status. The more luxurious car you drive, the higher your social status. Wealthy people in general are not concern with having high social status. They drive the normal family cars only.

Most of the rich invest in properties or stocks of good companies. These investment generate cash flows for them and they get even richer and richer. When the extra cash comes to them, they don't go and spend on all those luxurious items. They instead invest back the money and let it accumulate more.



Another important point is the rich enjoy what they are doing. They love their job, their work and their business. They often do not work for money any more. Whereas for the normal people, they work for money to support their spending habits. They may have high income but all their income is spent on keeping up their social status. They buy branded goods, drive luxurious, wear branded watches, live in high end apartments etc. Do you know someone like that? I bet you do.

So decide do you want to look rich? Or do you want to be rich?



4) They do not have parental financial support

Most millionaires are self made. This means they made their first million by themselves without any financial support. On the other hand, those who appear to be rich have a lot of finances from their parents. These young people who have all the luxuries in life have money from their parents. Their parents thought that by giving their children all these, they could get a financial head start in life and be successful later on. However, they are wrong. These kids will become financially dependant instead of independent. They always want to rely on someone else and think that their parents wealth are their wealth. The more money adult children receives, the less money they accumulate. The less money adult children receives, the more they accumulate.



You can strike a million dollars or you can make a million dollars. Which would you want? The wealthy people want to make their millions instead of strike it. Making their first million let's them value the money more and also experience the process of making it. They can go on to make their second and third million if they want. It becomes easy for them. Those who strike it either squander it away or mismanage it. It can become disastrous for them.



5) Their children are financially independent

Children from rich families are spoilt brats. That's what we often heard. During my secondary school days, i had a friend in my class who was really rich. His dad bought him a condominium at the age of 13. His allowance was $50 a day which makes out to $350 a week. His parents gave him everything including all the latest gadgets which he would bring to school to show off.


I was really envious of him that time. I was only getting $40 a week in allowance and thought how good it would be if i had his money. However, this friend of my had a very sad ending. He was really bad in his studies and failed almost every subject. He was frequently into gang fights and stole things from shops as a challenge with his friends. In the end, he was expelled from school and was caught for involving in gang fights and stealing. I have no idea where is he now.


My rich friend's parents might have a high income but they are not the truly rich people. These are the so called look rich people. The real rich people will have children who are financially independent. They are not given everything they want when they are young and are taught the importance of living a frugal life. They grow up to be sensible and independent adults.



6) They are proficient in identifying market opportunities


Rich people are constantly looking for opportunities. Opportunities to do business, opportunities to invest etc. When they invest, they make good investment decisions and manage to grow their money consistently. This has to be tied to the time and effort they spend on managing their finances and researching on investment strategies.



7) They choose the right occupation or business

This is very important. Rich people know what they want in life. They know their passion, their strengths and weaknesses. They know what they are good at and excel in that area. Choosing a career can be the most important choice of our lives. While many normal people live through life motionlessly from pay-check to pay-check, rich people excel in what they do and they love what they do.



Conclusion
This sums up the the 7 factors that differentiate rich people from normal people. As stated earlier, rich people have accumulated a net worth of more than US$1 Million dollars. The next time you look at a "rich" person who lives a luxurious life, see carefully if he or she is really rich? Is he or she deeply in debt? Can this person sustain his or her lifestyle if he or she stops working?


The path to true richness is the path of financial independence. When you reach financial freedom, you can choose to stop working and still can sustain your current lifestyle. When the time comes, you are not a slave to money any more. That is when you can live a free life not bonded by the worries of finances. It is possible for everyone to achieve that. Learn from the "real" rich people today!


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Related Posts:
1. A generation of instant gratification - The cause of unhappiness
2. Money or happiness? Which would you choose?
3. 5 ways how young people can save more money

16 comments:

  1. This is an very important blog post for all. Thank you for sharing this and introducing the book "The millionaire next door".

    This is one of the best personal finance book out there. All people should read and have the mindset change accordingly.

    I always tell my friends " What you save at end of each month is what really matters, you need money to grow money". Take good care of personal finance and one will be on a solid foundation to embark on the path of investment,

    ReplyDelete
  2. Hi Solace,

    Yes, this book is really good. It brings a new perspective to us. Another book I will recommend on personal finance is "The richest man in babylon". That book teaches personal finance in a story style. Its very interesting.

    Money doesn't grow on trees. Without savings, there can never be investment. Savings is like the foundation of personal finance.

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  3. I thought Retirement Income For Life is to grow Money Tree. No?

    LOL!

    ReplyDelete
    Replies
    1. Hi UncleCW,

      Maybe I should say money doesn't grow automatically on trees. We need to plant and water it. LOL

      Delete
  4. One more factor to consider - morality. If morality is involved, would they choose to be 'poor and moral' rather than 'rich and immoral'? For further discussion, readers may refer to my book series 'Wisdom on How to Live Life'.

    ReplyDelete
    Replies
    1. Hi Tommy,

      Good factor! Morality is an interesting topic by itself.

      We've seen quite a number of corruption cases in government offices, private corporations, religious organisations. Want to be rich and immoral? Be prepared to pay the price.

      Delete
  5. Hi SGYI,

    I am new to investing as well as your blog, I must say Im quite a fan already!

    I would like to know how would you would build a dividend based portfolio if you were an army boy who has limited financial capabilities.

    Warmest Regards
    A young army boy

    ReplyDelete
    Replies
    1. Hi,

      Welcome to the club where young investors gather ;)

      There are older people too though. We get to learn from them.

      If you have limited financial capabilities, my advise is to save up more. I used to save more than $300 during my army days when i'm only getting $500 plus NS allowance. A little of everything adds up to a lot.

      Truth be told, you need a decent capital to build a good portfolio. At least 5 figure i would say. Army is a good time to learn. Read books when you have free time. I picked up the habit of reading during army when there was a lot of free time before and after a major overseas exercise.

      All the best to you!

      Delete
    2. Thanks for the speedy reply!
      I actually have been reading up a couple of books now and have been told to be cautious when approaching the market for the first time.

      To me (a very new investor), everything seems like an opportunity and yet seems to be dangerous at the same time. My solution was to keep to things I know and hence I thought a dividend based REIT portfolio would be the best. I was wondering if you had any recommendations of stable and slow but steady growing REITs or good books to read on investments?

      I have been saving most of my pre-NS days and accumulated my first five figure sum too. Is the time ripe for me?

      Apologies for the annoyance caused by my very ignorant mind.

      Warmest Regards
      A young army boy

      Delete
    3. Hi,

      Don't have to apologize. Its good that you're willing to learn. Anything you can actually feel free to email me and we can discuss further.

      I'm not in favour of REITS now due to the potential rise in interest rates soon. You can read some of my past post on interest rates, quantitative easing and REITS in my blog to find out more.

      A very good book you can read is "5 rules for successful stocks investing" by pat dorsey. It teaches you how to read financial statements and how to value a company's worth

      Delete
    4. I have sent you my reply in an email!

      Thank you very much :)

      Delete
    5. Hi,

      Ok, we shall communicate by email :)

      Delete
  6. Not sure why many people think that S-REITS won't lose money just because of income yield

    ReplyDelete
    Replies
    1. Hi UncleCW,

      I think the reason is s-reits has made many people rich so people want to join in. Its like a bull market where many people have made tons of money and after that people want to join in also.

      What they didn't know is its always never good to be in the game late. The game is already over.

      Delete
  7. Hi SGYI!

    I can't agree more that this is a great book for anyone, any age. I would also recommend “Rich Habits: The Daily Success Habits Of Wealthy Individuals” by Thomas Corley. Habits are one hell of a thing to change though!

    I also found a summary of the key topics in the book- http://www.businessinsider.sg/ways-rich-people-think-differently-2014-5/#.VCZ2BfnEKm4

    Regards,
    The IA

    ReplyDelete
    Replies
    1. Hi The IA,

      Thanks for the recommendation for the book. I've never read it before. Will check it out.

      Habits are indeed hard to change. We got to develop good habits as early as possible.

      Delete