5 Rules of The Rich
Updated: May 19
Have you ever wondered how the rich become rich?
And, no, we're not talking about winning the lottery or magically stumbling upon a suitcase filled with $1,000,000. Though, it would be nice if it were that easy.
While we all dream of becoming rich (with minimal effort), we realistically need to consider more conversative avenues of wealth creation. So, if you're interested to learn how self-made millionaires have created their wealth, this may be the blog for you. We explore some of the five rules that many self-made millionaires like Warren Buffet have followed to become rich.
Pay yourself first
According to Warren Buffett, "statistically, the people who are most financially secure are the ones you wouldn't expect." Many of which have adopted the habit of paying themselves first. This technique involves putting a portion of your earnings into a savings account as soon as you get it.
Most people make a habit out of instantly paying their expenses as soon as the get paid and then depositing the rest. When you use the pay yourself first technique, you do the opposite. It works by putting a pre-determined allocation of funds into a savings account that can be used for investing or a achieving a long-term financial goal.
This strategy works best when your employer agrees to deposit this allocation of funds automatically into your separate savings account. You can request they put the rest of your income into another account dedicated to your bills and expenses.
Many people find that the paying yourself first technique is effective in terms of consistency and it reduces their likelihood to spend their funds before they have the chance to save it.
Be wary of spending on luxury brands
This rule also comes from the self-made millionaire, Warren Buffett. When discussing his conservative approach to brands, Buffett recommends living a conventional lifestyle. While it's okay to occasionally treat yourself, he like many others note that the rich wouldn't remain rich if they spent all their wealth on luxury items or brands.
When it comes to buying luxury property, Buffett recommends taking a conservative approach when living in your own home. If you're wanting to buy a luxury home, it's important to choose one from an investment perspective. For instance, you'd want to buy it with the intention of creating extra revenue from it or generating tax benefits.
Many self-made millionaires are able to grow their wealth when they spend less.
Know how to leverage
The process of leveraging in real estate involves utilising the equity from one or more properties to build an investment property portfolio. Many millionaires are real estate investors and they know how to effectively use this strategy.
Real estate is a trusted method of building cash flow and capital growth. Moreover, utilising the power of leveraging can provide you with the opportunity to build greater cash flow and capital growth with minimal effort.
If you already own a property, you have the capability to leverage the equity within that property to purchase another property. Then overtime, as the equity continues to grow, you repeat the process.
The great thing about leverage is that you only need to put a small amount of cash in to be able to generate more revenue over time. With real estate, you will find that over a certain period, the rate of interest increases and so does the value of your property. This boosts the equity on your property(ies) and can allow you to leverage and repeat the cycle of financial growth.
Familiarize yourself with the tax system
Please don't think that you need to do the dodgy. In fact, the Government have measures that allow you to legally utilise their tax system to recoup your losses. Even more so when you're a property investor.
If you're a high-income earner, let's say you're earning more than $120,000 a year, a quarter of that goes to the tax man every year!
If you're an investor, there are measures to recoup those losses and plus some (depending on the size of your property portfolio).
Did you know that as a real estate investor, you can claim anywhere between $3,000-$10,000 in depreciation and other costs, PER property every year? Not to mention, that's on top of your income that you generate from rent.
Many self-made millionaires, utilise real estate as a form of passive income to make the most from tax benefits. The key to recouping your losses is through understanding what you're able to claim. That's where you'll discover a good accountant comes in handy. To learn more about what real estate investors can retrieve in tax returns, check out a prior article that we wrote here.
Create several streams of income
In today's day and age, relying on a sole income is going to delay your chances of creating wealth. In an article by Business News Daily, they state that self-made millionaires have multiple streams of income. While it's important to have an earned income in the lead up to your retirement, having multiple diverse streams of income can help you become rich quicker.
There are plenty of ways that you can create additional streams of passive income. Our favourite, and arguably the most popular, is through real estate investing. Real estate investing allows people to create income from rent and capital growth.
You may also choose to invest a portion of your savings into shares. Shares are not always guaranteed to see growth and are subject to fluctuation. The College Investor identifies having a second salary and making money from a hobby as other valid income streams.
Kick start your journey to financial freedom
If you're thinking about kicking your financial goals into gear, REIF are here to help. As the leading finance and property investment groups in the country, we're here to assist you with building wealth through property. Our team has more than 100 years of combined industry knowledge that you can tap into to make strategic decisions for your financial future.
If you would like to book in for a discussion about your financial future, we would love to get involved. Book via the button below or feel free to give us a call on 1300 130 932.
We explore this topic in our eBook 'Building Wealth Through Property.' Check it out here for FREE!