How one thinks about money largely determines the level of financial independence they enjoy. File picture: Steve Buissinne/Pixabay
How exactly does one become wealthy? Not just living comfortably, but rich?
This is a question that many individuals ask themselves in South Africa’s embattled economy.
The head of Public Policy and Regulatory Affairs at PSG Wealth, Ronald King said that he receives multiple queries from investors on how successful people go about using their money.
This involves questioning what wealthy people do differently and whether they just inherited their fortune.
“First of all, we should ask ourselves what we see as rich. There are various definitions of high net worth clients, like having to be a US dollar millionaire (over R18,000,000) to be considered really rich,” said King.
He went on to state that individuals who are genuinely wealthy are unconcerned about money and that financial stability is established by how you manage costs rather than income.
“We often see this when salaried people get an increase. Things are going well for a few months, until their expenses once again exceed their income landing them in financial difficulty yet again,” King said.
“Farmers and businesspeople find it even more difficult. Achieving a good crop may trigger big new expenses incurred without making any provision for future lean years. So the first step towards getting rich is to manage your expenses – especially recurring expenses.”
Successful people build reserves
According to King, this includes refusing to invest every possible cent in their firm, a mistake done by both businesses and farmers.
While they live a good life on the farm, any extra earnings are reinvested back into the agricultural company, since this is where the highest yield can be found. This technique would be beneficial if the goal was to sell the farm.
Keeping money in cash is not a wealth-building solution either
“This can be a ‘recklessly conservative’ investment, saving yourself into bankruptcy. Your investments should be tailored to your needs and investment horizon. Any money not needed in the next 10 years or so can be invested a lot more aggressively.
“Remember, you’re not old when you’re 60 and you will use some of your money only in 40 years’ time. Of course, the idea is to take calculated risks with your money, not being tricked by get-rich-quick schemes. And don’t we love them all.”
Investing in equities is an aggressive investment
However, do not invest in a single firm; instead, diversify your investment over several companies.
Equity risk is not binary; it is not a matter of losing everything or gaining a lot of money. Equity risk is that we don't know how long it will take for the firms’ value to rise.
Avoid investments that carry the danger of losing everything. And be sceptical of assurances. A guarantee is only worth as much as the person making the pledge.
Families often lose their wealth in three generations
This is a phenomenon that King claimed to have witness numerous times.
“As the saying goes, ‘From shirtsleeves to shirtsleeves in three generations.’ The biggest problem is that we don’t invest enough time in teaching our children to become money smart. Most people with wealth have worked very hard making a lot of sacrifices when it comes to their family. Using money to compensate for this may cultivate the wrong money mindset,” said King.
“The psychology of money is a very interesting subject, and how we think about money largely determines the level of financial independence we will enjoy.”
He suggested that one of the most essential skills to teach children is delayed gratification. Waiting till tomorrow may allow one to purchase a more expensive or higher-quality item.
So, according to the expert, being truly wealthy is not about accumulating more money. Real riches comes from controlling your costs and being satisfied with what you have.
IOL