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Five Things You Need to Know about Getting Rich

The algebra of getting rich is not complicated. You need to earn more than you spend, and you need to invest that surplus into high-quality assets that are able to deliver a reliable stream of returns over the long term. So if it is so simple to get rich, why are the majority of people battling to pay the bills and living paycheck to paycheck? The answer is simple - the lack of financial education. You were never taught how to work with money at school. In this blog, you will take your first step to financial education with the building blocks of how to get rich. 1) Luck Plays a Role

Rich people have no room for arrogance. If you were born into a functional and supporting family, in a country with easy access to high-quality education, you have won half the battle. It is easier for a person born in the 1970s in the US to become financially free than for someone born in the same decade in Zimbabwe. So, I am not going to lie to you that everyone should be rich - that is not economically possible. What I am saying is that there is a disproportionately large number of people in this world that are living far below their financial and economic potential.

2) The Richest Person is not the Person with the Most Money

Making money is easy, the hardest part is saving money. Who would you say is the richer person? The person who earns a million every year and spends a million, or the person that earns 100k and spends 50k? Let me tell you the story of Theodore Johnson who worked his way up the newly formed UPS company in 1924. He was no prodigy nor an executive. Theodore worked in the personnel department, and he never earned more than $14,000 a year. But he later ended up with a net worth of over $70 million. The biggest advantage he had was that he understood the power of compound interest at an early age and took advantage of that. Theodore had bills to pay, a family to support, and monthly expenses, however, he understood that there was no bill in his mailbox which was more important than his freedom fund. He made sure that his financial priority was to set aside 20% of every paycheck he received (including Christmas bonuses) and he put it into his company’s stock. The value of the UPS stock he owned soared to over $70 million by the time he was 90 years old. The richest person is not the person who makes the most money - it is the person who saves and invests the most money.

3) Patience is the Secret Weapon

We live in a world of instant gratification. In a world where you can order a taxi on your phone, and get same-day delivery on millions of products, it is not surprising everyone is so impatient. When your internet goes down for a couple of minutes, you feel your world is imploding. That is why people are drawn into get-rich-quick schemes. If you have Googled anything about money and finance in the last month, the algorithm would be sending you adverts for forex trading lessons. There is a reason why casinos make so much money, and national lotteries are swimming in cash. The lure of the easy buck is obvious - human beings love the idea of getting something for nothing. The problem is that making money takes time and patience. When you start a business, you need to toil day and night to get it up and running. You then need to nurture it and grow it until it realizes some potential, and even then it requires your constant attention. You make money through compounding over the long term.

Albert Einstein said that “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn't … pays it.” When you invest over the long term and reinvest your profits, not only do you earn a return on your initial investment but you also earn a return on your profits. This snowballing of returns leads to some exceptional non-linear results. Let's say you invest 1,000 bucks (insert your currency here) into the stock market every month. Let's assume the stock market delivers a return of 10 percent per year (which is the long-term average). After 10 years, you will have 204,845 bucks. If you double the term to 20 years, your return goes to 759,368. If you double the term again to 40 years, the total return goes to 6.3 million. Notice the maths. Doubling the term from 10 to 20 years (2x) gives you a 3.7x return. Doubling the term from 20 years to 40 years (again 2x) gives you an 8.3x return. The relationship between time and return is not linear, it is exponential. 4) Boring is Better We are all drawn to what is sexy, exciting, and interesting. This is true for our careers and social lives. If someone had to make a toast to you, and wish you a boring and simple career and life, you may be taken aback. But let's drill down into the world of boring and assess whether it really is the kiss of death. Tech is the hottest sector right now. Everyone wants to learn how to code, start a tech company with a killer app, and hire an army of whiz kids in hoodies to work out of a modern industrial-styled office with free catering and unlimited vacation time. Careers are like asset classes. When everyone wants to invest in real estate, prices get inflated and returns get diluted. The industries that everyone wants to work in have the lowest return on your efforts because everyone wants to be in them. They attract the best talent and if you want to stand out and be super successful, you need to be a genius. Twenty years ago it was cool to have a job. Now it is cool to start your own business. We now romanticize entrepreneurship, but the truth is that it is not as rewarding as everyone thinks because it is starting to get crowded with many people chasing after the same market. If you are in the business of web design, you are competing with millions of people around the globe that are probably better and cheaper than you are. To be successful as an entrepreneur, you have to go against the flow - offer a simple product or service that is so boring and mundane that no one is prepared to do it. It is also so boring that people are dying to outsource it to a third party (you).

5) Learn from the Stoics

A stoic is a person who can endure pain or hardship without showing their feelings or complaining. They are able to control their emotions and they are able to distinguish between what they can and cannot control. The biggest weakness of humans when it comes to investing is their emotions. When it comes to money, the two biggest emotions are fear and greed. The fear of losing money is greater than the thrill of making money. Investments tend to be volatile so there is a way to eliminate emotions from the equation and be as stoic as possible. This is the trick. Firstly, you take a long-term view, which means you are not allowed to check your investment account every day, every week, or even every month. You can check once a year. If you check every day, the short-term volatility is going to drive you nuts. Investments, while highly volatile and unpredictable over the short term, are more benign and predictable over the long term. Secondly, you need to dollar cost average. You need to make frequent small monthly investments. By averaging your investments over time, you eliminate the need to time the market and you maximize the amount of time in the market. You cannot control or predict the market in the short term - no one can. You need to let the market do its thing, and you need to focus on your thing - making emotion-free, stoic, and consistent investments for the long term.


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