A stereotype of rich people is that they are greedy and materialistic. In reality, however, many wealthy individuals are quite frugal and careful with their spending. Rather than letting their money work for them, they have learned how to make it work for them.
The purpose of this blog post is to identify some of the differences between rich and poor people in terms of how they handle their money. We hope that you can also use some tips from this article to improve your financial situation.
1. They’re frugal.
Perhaps one of the worst-kept secrets about the rich is that they’re frugal. A classic example of this is Warren Buffett. In 1958, he bought a five-bedroom house in Omaha for $31,500 and has lived there ever since. And, Buffett is known to spend little.
When you are frugal, you take care of your resources, such as money, time, or food. In addition, it can mean avoiding extravagance, waste, or lavishness. Sarah Stanley Fallaw, director of research for the Affluent Market Institute and author of The Next Millionaire Next Door: Enduring Strategies for Building Wealth, a study of more than 600 millionaires in America, describes this as one of the wealth factors helping millionaires build wealth.
Stanley Fallaw interviewed many millionaires who stressed the freedom that comes with spending less than they earn.
“Spending above your means, spending instead of saving for retirement, spending in anticipation of becoming wealthy makes you a slave to the paycheck, even with a stellar level of income,” she wrote.
2. The focus is on the long-term potential of money.
According to Tyler Johnson, a certified financial planner and owner of Stillwater Financial Advisors, a rich mentality is centered on the long-term potential of money.
“This mentality focuses not only on what the money may be able to accomplish in the present,” he told GoBankingRates, “but weighs that against what it could do in the future.”
Those with this mentality think about the opportunity cost of money as well as budgeting effectively: If I choose option A, I will not be able to choose option B. So which option should I choose?
“People with a rich mentality separate their funds into goal buckets and prioritize the importance of those buckets for an easier time monitoring progress and pushing to reach goals in certain time windows,” Johnson added. “A rich mentality sees a person seek out the ways they can get the best risk-adjusted return for the money they are putting away and assigns every available dollar to its most useful home.”
3. Equity is a priority.
The majority of people think that becoming wealthy is a result of having a high income. Having a high income certainly helps, but ownership is the key to wealth — especially for the super-rich.
A 22-year study of wealth creation in Norway found that the super-rich are risk-averse, prefer private equity, and save a lot. Wharton finance professor Sergio Salgado, St. Louis Fed research officer Serdar Ozkan, Penn economics professor Joachim Hubmer, and Statistics Norway researcher Elin Halvorsen explain in their “Why Are the Wealthiest So Wealthy? A Longitudinal Empirical Investigation,” that wealthiest investors “invested substantially more in private businesses from very young ages. Across all ages, the share of risky assets (private and public equity) in their investment portfolio remained above 80%.
In the 50-54 age group, equity income accounted for 83% of lifetime income for the top 0.1%. Labor income accounted for 80% to 90% of lifetime income for households in the bottom 90%. “A very small fraction of people became rich purely through labor earnings,” Salgado said. “Labor earnings are not going to make you significantly rich; it’s just not how it works,” added Hubmer.
These portfolios had a much smaller share of safe assets and housing, which remained relatively constant over time.
Also, the super-rich never raised their leverage (or borrowings) above 10% of their total assets.
4. Their borrowing rules are different.
You may think you only borrow money when you don’t have any, but that’s not the case. Taking on debt is not unique to the well-off; it is just done in different ways.
Rich people have different money habits, of course. However the wealthy tend to follow four borrowing rules that others rarely follow:
- Use debt as a tool. If very rich people believe they can improve a company’s profitability, they may borrow money to acquire it, for example. Investing in more assets will help them build wealth, as well as borrowing to fund a startup business.
- Make credit cards pay you instead of you paying them. It is common for rich people to use credit cards. To avoid paying interest, though, they charge all of their purchases to their cards and then pay the balance in full to collect rewards.
- Don’t borrow for depreciating assets. It makes little sense for rich people to borrow money for things that will go down in value instead of going up.
- Make lenders work for your business. Wealthy people don’t simply accept loans on any terms the lender offers them. In many cases, they force lenders to work for them. To do this, you could simply shop around to get quotes from different banks or credit unions before deciding which one to work with.
5. Their income is diversified.
“Self-made millionaires do not rely on one singular source of income,” said Thomas C. Corley spent five years studying millionaires and gathered his insights in multiple books, including Change Your Habits, Change Your Life. “They develop multiple streams.”
In his study, he found that “three seemed to be the magic number in my study,” adding that 65% “had at least three streams of income that they created before making their first million dollars.”
Rental property, stock market investments, and part-ownership in a side business are examples of additional streams of income.
6. They do not have a budget.
Surprisingly, millionaires can save money without budgeting. It turns out that many millionaires interviewed by ESI Money didn’t have a budget.
“While it was not expected, the reasons millionaires don’t need a budget makes sense — they make a lot and have self-control,” the blog post stated. “In other words, they make a ton, spend only a portion of it, and have plenty left over. Who needs a budget?”
“A budget is great for the early phases of a financial plan, but if you can grow your income and develop self-discipline not to spend, it’s not vital to your success later on.”
7. Investments are rarely sold by them.
The majority of people with little wealth don’t invest much. If they do, once the market goes down or they want to buy something else, they sell those investments.
Wealthy people, however, don’t do that. Often, they stick with the same portfolio for a very long time. Whenever they need money, they borrow against their portfolios. As a result, they can keep compounding their investments instead of paying taxes when they sell them.
8. They take advantage of everything their employer has to offer.
You should thoroughly review the benefits plans offered by your employer. A company can help you save money, invest to earn more, and even offer you more than a retirement plan.
Faron Daugs, the founder and CEO of Harrison Wallace Financial Group, recommends leveraging some of the benefits below to benefit yourself.
- Matching retirement contributions by the employer. Contribute enough to match employer contributions if you can afford to do so. “The match is basically ‘free’ money to you,” Daugs says.
- Life and disability insurance offered by employers. By purchasing insurance policies through your employer, you can save a significant amount of money compared to buying them on your own.
- An employer-sponsored health savings account (HSA). Your employer might match your HSA contributions if you qualify. The contributions you make are tax-deferred.
- Legal services for employers. You may be able to get legal services through your employer’s plan. Use your benefits plan’s legal services if you ever need estate planning documents, such as wills or trusts, to save money on attorney fees.
- Employee Stock Purchase Plans (ESPP). You can typically put up to a certain percentage of your pay into your employer’s ESPP, which gives you the option to buy company stock at a discounted price. “If you feel good about your company and their stock, this can be another cost-effective way of investing to continue to build your net worth,” says Daugs.
9. Among their relationships, four are the most important.
Wealth can’t be built alone.
For seven months, Chris Hogan, author of Everyday Millionaires: How Ordinary People Built Extraordinary Wealth — and How You Can Too, studied 10,000 American millionaires and discovered that they achieved their seven-figure status through four key relationships: a coach, a mentor, a cheerleader, and a friend.
10. The rich are never content.
A friend of Grant Cardone, the best-selling author and CEO of Cardone Capital, has worked with some of the world’s wealthiest people.
Cardone once asked him what they had in common, and he replied: “None of them were ever satisfied with what they had already accomplished, but instead focused on the next thing that could be accomplished.”
Despite their previous accomplishments, the wealthy are never satisfied, Cardone explains. In their minds, they are always capable of achieving more. As a result, “this helps them think big about future business ideas, inventions, investments, and other wealth multipliers.”
Do rich people have different spending habits than everyone else?
Generally speaking, rich people spend differently from everyone else.
Spending money on real estate and investments, which appreciate, is more likely for them. A higher percentage of them also spend money on experiences like travel and entertainment.
How do rich people invest their money?
Stocks, bonds, real estate, and businesses are some of the ways rich people invest their money. Their investment portfolios are typically diversified and tailored to their individual risk tolerances and financial goals.
How do rich people save money?
The wealthiest people live below their means, automate their savings, and invest their money wisely to save money. In addition, they do not take on unnecessary debt or make impulsive purchases.
What kind of debt do rich people have?
There may be some debt among rich people, such as mortgages on their homes or business loans. However, they usually avoid accumulating a lot of credit card debt.
How do rich people protect their wealth?
Rich people need to have a strong estate plan in place to protect their wealth. To protect their assets from lawsuits and other risks, they may also invest in insurance and other financial products.