Have you ever heard the saying “The rich get richer”.
While few can offer any mathematical proof, there are 4 keys to wealth accumulation that most financial professionals can agree on.
1. Increase Income
A person’s income depends on internal factors like his diligence, education, capabilities, entrepreneurship, inheritance; as well as external factors like unemployment rate, and economy. Generally, an individual can increase income through education, self improvement, and entrepreneurship.
2. Increase Savings
Although income is important in wealth accumulation, that alone is not enough. If you spend more than you earn, you will end up with a deficit. To accumulate wealth, you must consistently save part of your income.
Savings rate = Savings/Income
Savings rate is often used by financial professionals when advising clients on the amount they must accumulate to retire comfortably. However, savings alone is not enough. Ideally you should invest in financial instruments with higher potential returns.
3. Reduce Spending
Everyone need to spend on basic necessities like food , water, electricity, clothes, and housing. Economists call these subsistence expenses autonomous spending. In theory, everyone rich or poor, has the same autonomous spending. However in reality, the rich spend more because they want higher living standards.
4. Increase Investment
Investment vehicles like stocks, bonds, unit trusts, etc, may offer higher potential returns compared to a regular savings account. These can help you accelerate wealth accumulation.
Why The Poor Remain Poor, While The Rich Get Richer?
The poor spend most of their income on basic necessities and are unable to save. Therefore, they remain poor and cannot break out of poverty.
The middle class have higher income than the poor, but also higher spending. They usually spend most of their income on liabilities (eg. luxury items, cars, condos, vacations, etc). As a result, they have little money left to invest, and are unable to accumulate much wealth.
The rich have the highest income but also the highest spending. However, unlike the poor and middle class, they invest heavily in income-generating assets like stocks, funds, property, businesses, etc. These assets are often able to generate more than enough money to pay for their luxury lifestyle. This is how the rich get richer.
To accumulate wealth, there is thus a trade-off. Enjoy less now, save and invest more to accumulate greater wealth to enjoy later. Because this is a personal choice, there is no right or wrong answer. But in the case of wealth accumulation, delayed gratification usually pays off well.
