Rich get richer: here’s four reasons why, and how to join them

The wealthy have ways to multiply their money that the masses can also employ. These four lessons are a great starting point.

Growing up in a working-class suburb without much money, a comment I commonly heard from adults was “the rich get richer and the poor get poorer”.

It was spoken with an air of resignation rather than complaint, and it’s stuck with me for decades.

For millions of Australians, rich people and their money machinations seem too confusing to comprehend – apart from the fact that the rich always seem to keep making more cash.

But there are a few key reasons why they get richer, with some handy lessons for anyone wanting to emulate them.

1. COMPOUND INTEREST

You don’t see too many rich young people, apart from successful entrepreneurs or those born into wealth, and that’s because it takes time to grow assets.

It often takes money to make money, because the benefits of compound interest – famously described by Albert Einstein as the eighth wonder of the world – are biggest for large assets.

For example, a $500,000 asset compounding at 10 per cent annually increases your wealth by half as much as a $1 million asset. After a decade, that $500,000 investment grows to $1.35 million, but the $1 asset is worth $2.7 million.

This is why property investment is so popular in Australia, and those 20 per cent annual gains many real estate owners have enjoyed in the past year translate to huge dollar amounts for people with portfolios of two or more properties.

2. LEVERAGE

I usually avoid using the word “leverage” because it sounds too much like the finance-speak that puts off many people.

But it’s vital. Leverage has two key meanings – to use something to maximum advantage, and to use debt to buy assets – and both tactics are employed by rich people.

Lifestyles of the rich may be closer than you think, if you adopt some important strategies.

Debt is how businesses and investors grow their wealth faster because it helps them build bigger assets that are better for compounding returns.

Other people’s money – often a bank’s – is a brilliant tool for building wealth.

Many rich people also leverage their personal and professional relationships to get ahead. Who you know – and who can share business and investment opportunities – is important, but if you don’t enjoy networking, there are other options.

3. PROFESSIONAL HELP

You won’t find many wealthy people who take a complete DIY approach to their personal finances.

Most have a team of money specialists including an accountant, financial adviser, solicitor and estate planner.

Financial advisers have been attacked in recent years, most notably at the banking royal commission, but the strategic knowledge they share with their clients can have a huge positive impact.

People starting on the wealth path probably won’t immediately need a large professional team, but can benefit from a lot of good advice by spending time researching money and investment. However, always beware of dodgy get rich quick schemes that inhabit the internet.

4. PROPERTY POWER

Almost every wealthy person owns real estate, even if it’s just their own home and it delivers them spectacular tax-free capital gains.

Owning your own home is not just a secure roof over your head. Its rising equity allows investment in other assets such as shares or more property (using leverage!).

While the current housing boom makes it tough to get a foot in the door, property ownership should be a goal of anyone wanting to get rich, then richer.

Originally published as Rich get richer: here’s four reasons why, and how to join them