How do you get rich?
11 Jan, 2024

Ronald King – Head: Public Policy and Regulatory Affairs at PSG Wealth

 

Lately, I have received several questions from investors about how rich people go about their money. What do they do differently, or have they simply inherited wealth? At PSG, our clients include a substantial number of families who have accumulated wealth over many generations, but many are first generation.

 

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. However, the question remains: When is enough enough? In my experience, people who are really rich are those who are free of any money fears. This financial stability is not determined by your income, but the way you manage your expenses.

 

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. 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, not investing every available cent in their business – a mistake made by many businesspeople and farmers alike. While they are enjoying a comfortable lifestyle on the farm, any surplus funds are ploughed back into the farming business, as this is where the best yield is to be found. This strategy would be effective if the idea is to sell the farm. In South Africa, most farms are passed on from generation to generation, which means the investment into the farm is never realised. So a clear distinction should be made between the farmer and his/her assets and the farm.

 

Keeping your 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, buying ownership in other businesses. However, we don’t invest in one company only – the investment is spread over a number of companies. Equity risk is not binary – it’s not a matter of either losing everything or making tons of money. Equity risk means we don’t know how long it will take for the companies to increase in value. Avoid investments involving the risk of losing everything. And be wary of guarantees. A guarantee is worth only as much as the person who makes the commitment.

 

Families often lose their wealth in three generations – a phenomenon I have witnessed several times, unfortunately. 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.

 

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. One of the most important skills we can teach our children is that of deferred gratification. Waiting until tomorrow may enable us to buy a more expensive or a better quality item. Checking our children’s bank balances on a regular basis is also essential. Ignoring the money we save is defeating the purpose – the child needs to learn that this is an asset. Discussing your child’s bank balance with them and helping them set goals for deferred gratification will foster a savings mindset.

 

So, being really rich is not about chasing more money. Real wealth comes from managing your expenses and being content with what you’ve got.

 

 

ENDS

 

 

Author

@Ronald King
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