3 Massive Wealth Building Principles
My rich dad, my best friend’s father, offered different advice about money than my real dad – who I call poor dad.
He would say and ask things like…
“How long would it take you to save $1 million?”
“Who is going to get richer in the long run? Someone who works all his life trying to save a million dollars? Or someone who knows how to borrow a million dollars at 10 percent interest and also knows how to invest it and receive a 25 percent per year return on that borrowed million dollars?”
“Who has to be financially smarter with money? Someone who works hard for money or someone who has money work hard for him?”
When it came to working, money, savings, and debt, it is obvious that my two dads had completely different points of view.
But the biggest difference in points of view was this statement by my rich dad:
“The poor and middle class have a hard time getting rich because they try to use their own money to do so. If you want to get rich, you need to know how to use other people’s money to get rich, not your own.”
Today I want to share three basic principles I learned from my rich dad on how to build massive wealth like the rich.
1. How Fast Is Your Money Moving?
One of the reasons Kim and I retired early was because we kept our money moving.
Rich dad often referred to this concept as the velocity of money. He said, “Your money should be like a good bird dog. It helps you find a bird, catch the bird, and then goes out and gets you another bird. Most people’s money acts like the bird that just flies away.” If you want to retire young and retire rich, your money must be like a bird dog, going out every day and bringing home more and more assets.
Today, many financial planners and mutual-fund managers say to the average investor, “Just give us your money, and we’ll put your money to work for you.” Most investors nod and repeat the mantra, “Invest for the long term, buy and hold, and diversify.” Their money gets parked, and they go back to work.
For most investors, these are pretty good ideas, given that most investors have no interest in learning how to put their money to work. They seem to prefer working harder than their money. The trouble with these plans of average investors is that they are not necessarily productive investment strategies, nor are they necessarily safer.
Kim and I did not keep our money in a retirement account to retire young. We knew that we had to keep our money working hard to acquire more and more assets. Once our money acquired an asset, that money was soon reemployed to go out and get us another asset. The strategy we used to keep our money moving and acquiring more and more assets is a strategy that almost anyone can use.
One of the strategies we used to keep our money moving was to buy a rental property, and within a year or two, borrow out our down payment and buy another rental property. That was following rich dad’s advice of using money as a bird dog.
You may notice that Kim and I borrowed money to buy investments. The average person uses debt capital to pay off bad debt. This is an example of the bird flying out the window. While it is still a velocity of money, it is the velocity of money going away from you, rather than acquiring assets for you.
2. Who Works Harder—You Or Your Money?
One of the reasons people work so hard all their lives is simply because they were taught to work harder than their money.
When most people think of investing, many just park their money either in a savings account or in their retirement account, as they continue with their life of hard work. While they work, they hope their money is working too.
Then, when something like a financial disaster comes along, their parked money gets decimated and most people have no financial-disaster insurance.
Your money should be working harder through leverage.
Leverage is simply using debt to purchase assets rather than your own money.
The rich use good debt to invest in cash-flowing assets. This is a fundamental concept of Rich Dad and a sign of high financial intelligence. By using good debt, you can dramatically increase your Return on Investment (ROI)—and you can even achieve infinite returns.
Because of this, you have two choices when you find a worthy investment: use your own money or use other people’s money. Provided you structure the deal well, the more you can use other people’s money, the higher your return will be.
Many people think it’s a fantasy world that people would just give you money to invest, but that couldn’t be further from the truth. The reality is that most people don’t have time to find good deals. Instead, they rely on people with proper financial education, skill set, and drive to bring deals to them.
3. The 8th Wonder Of The World?
There’s a reason why banks recommend savings as a habit when you’re young. If you start young, it’s easier to be rich. There is a staggering difference between a person who starts saving at age 20 versus age 30. One of the wonders of the world is the power of compound interest.
The purchase of Manhattan Island is said to be one of the greatest bargains of all time. New York was purchased for $24 in trinkets and beads. Yet if that $24 had been invested at 8 percent annually, that $24 would have been worth more than $28 trillion by 1995. Manhattan could be repurchased with money left over to buy much of Los Angeles.
Let’s say you deposit $10,000 into a certificate of deposit (CD) at the bank. Suppose the interest rate you earn is 5 percent. After the first year, you’ll have earned $500. Now, let’s say that you leave the $500 in the bank. Now you have $10,500 in the bank. The interest rate of 5 percent is applied both to the original $10,000 and to the $500 of interest you earned over the previous year. So in the second year, you’ll earn $525 of interest. The extra $25 in the second year is the interest you earned on the interest from the first year—compound interest.
Compounding interest is important. It should also be just as clear that it’s a pretty slow way to build wealth.
But if you combine all three strategies, you can build massive wealth by adding velocity to your compound interest using someone else’s money.
Editor, Rich Dad Poor Dad Daily