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13 March 2024

6 Reasons why the rich get richer and richer

  • Compound interest & compounding gains

Compound interest is basically the interest earned on interest, on interest, on interest infinitum from one single act of investment.

When money is invested it earns interest, what makes compound interest a wonder is that the new interest paid earns interest on interest over time. This eventually creates a snowball effect, where growth is not linear but exponential.

For the wealthy understanding and harnessing this power early, means that their money is continuously working for them earning more money even when they are asleep.

  • Leverage

Leverage is other people’s money (OPM). Simply its debt taken out to maximize opportunities by the wealthy, it’s a double edged sword that can amplify gains but can also magnify losses, whereby the rich know how to wisely use debt to magnify their returns, debt taken out for consumption can become a burden and slow growth.

This strategy also comes with its risks; however the rich often have the shock absorber to absorb such potential losses making leverage a powerful tool in their armory. The rich approach leverage with a strong knowledge in the business opportunity they desire to leverage and mitigate potential losses using their collaterals, insurance or other tactics available to them.

  • Network and Networking.

The rich know that their network is their net worth, who you know can also be as important as what you know. The rich build and cultivate networks of influential peer’s, mentors and partners.

These networks usually offer first information on new opportunities and collaboration that can lead to exponential growth. As their wealth grows, so does their network, leading to even more opportunities.

  • Ownership and Passive income.

They wealthy focus on acquiring assets that generate income, without their active participation, whether in a thriving business, rental properties, and royalties from intellectual properties.

These assets provide them steady stream of passive income that maintains their wealthy status. They spend money on buying assets that cash flow. They avoid frivolous toxic spending’s like buying liabilities that takes money from their pockets.

Overtime these incomes can surpass active income, allowing them to focus on further wealth building ventures.

  • Tax strategies and Tax Efficiency

Taxes can take a significant chunk out of earnings, however in many tax jurisdictions; the tax codes are filled with many tax loopholes, nuances, tax reliefs, deductions and waivers that can be advantageous to those who know how to navigate them.

The wealthy often employ tax experts who help them strategize on how to minimize tax liabilities, take advantages of tax incentives, tax reliefs and write-off’s and structure their investment to be tax efficient.

  • Mindset, beliefs and risk tolerance

Beyond strategies and tactics. The mindset plays a very critical role in wealth accumulation. The wealthy often view challenges as stepping stones rather than obstacles.

They are willing to take calculated risk, understanding that failure is part of the success journey. This resilience and forward thinking mindset means they keep getting richer.

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