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What The Rich Know That You Don’t

(L-R) Warren Buffett, Jamie Dimon and Cathy Baron-Tamraz (Photo by Donald Bowers/Getty Images for FORTUNE)

Is the gap between the rich and poor getting wider? Or, are more people getting smarter and moving out of the lower and middle classes? I would like to think the latter is happening. According to the last census there are four times more people in the top 20 percent of all wage earners than there are in the bottom 20 percent. What does that top 20 percent know that you don’t know? — Here are a few of the things they do that you don’t.

They Plan Ahead

Most middle class families spend more time planning a vacation they can’t afford than planning their financial future. Rich people plan on living decade to decade not paycheck-to-paycheck. They put their money to work by opening IRA’s or Mutual Funds that generate income in addition to their original investment. If you had invested $10,000 in Walmart in the early 1970’s you’d be looking at several million today. The wealthy look for assets that will grow over time without any effort on their part. Rather than seeking immediate gratification and accumulating material things, they plant seeds that grow, mature and produce over time.

They Understand How Money Works

Which would you rather be? A heart surgeon making $300,000 per year, or a middle manger making $100,000 at your job, and an additional $200,000 from rental income, dividends and other investments.

If the heart surgeon dies that income stops and that family is in real trouble. If the middle manager dies, that family is still going to have a healthy income to pay bills and keep going.

Passive Income Not Active Income

I’ve written three books that people buy online, in bookstores, on Amazon and at seminars and workshops I deliver. I did the work once yet it keeps on producing income for me even while I’m sleeping, watching TV or just relaxing on the deck. That’s passive income.

Active income is doing the work, spending the money and then having to do the same work all over again to re-create the same money. Which sounds more attractive to you? Most people’s major investment is buying a weekly lottery ticket. Big payoff, but not a high percentage of success.

Raindrops Cause Floods

Most middle class families don’t think they make enough to invest. Living paycheck-to-paycheck has become engrained in their psyche. Why not start paying yourself first. Something as simple as putting 10% of each paycheck in savings and learning to live without it will make a tremendous difference in your life.

If you were making a modest $30,000 (about $14.00/hr.) you’d save $3,000 a year and I can almost guarantee you’d never miss it. Using simple compounding interest, that invested amount would double every seven years. And, so would the next $3,000, and the next, and the one after that. In ten years your life is going to look a lot brighter than it does today. If you don’t do this, guess what? Ten years will still come and not much will have changed.

Some Final Thoughts

Even people on welfare and food stamps have the ability to save small amounts of cash every month. The good news is, you don’t have to do it forever. Money has a way of growing very quickly regardless of economic conditions. You have some decisions to make.

If you are willing to live for a short period of time like most people won’t; you can live the rest of your life like most people can’t. Are you willing to make that temporary sacrifice?

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