So how do wealthy people achieve financial freedom and independence?
Certainly not by working hard and saving, which is what most working people try to do. No, what separates the financially rich from the financially poor is their attitude towards money. The financially rich see money as a resource to be used to make more money. It is this ‘use-value’ of money that’s the lynchpin. Money to the financially rich is for acquiring ownership in high-quality businesses that pay the owner to own them. This is called investing and it’s a world away from the ‘saving’ that most people pursue or the rampant casino-style speculation that characterizes so much of what passes for investing.
Creating a Child Millionaire starts by you changing your thinking. First you need to delete ‘saving’ from your vocabulary and thinking and replace it with ‘investing’. You are no longer saving for your child’s education or retirement, you are investing. Your child doesn’t have a ‘savings’ account, they have an ‘investment’ account. What’s the difference? A saver puts money in a bank where the interest of say 0.1%, or if you have a large enough deposit a ‘high rate’ of maybe 2.8%, is eroded by inflation that is two to ten times higher. This means that over time the saver actually loses money and is in effect paying the bank to store his or her money. Left long enough, your average bank account will eventually be reduced to virtually nothing by the ravages of inflation.
Conversely, an investor is someone who takes the money they save and puts it to use buying assets that provide a return or income stream. People who are financially rich are owners, poor people are savers. The difference is fundamental. You must become an owner.
Unlike the saver who puts money into the bank, an investor would purchase stock or ‘shares’ in the bank and thus becomes a part-owner of the bank. As an owner, the investor is entitled to part of the bank’s profits, paid as dividends, which are the shareholder’s share of the bank’s profit. The profit is of course made by taking savers’ money, which costs next to nothing, leveraging it many times over, and lending it out at higher rates of interest to mortgage holders, savers who dip into their overdraft or people with credit card debt.
A bank share might ‘yield’ (pay an annual dividend) of 5%, which means that if you own $1,000 worth of shares you would receive $50 per annum compared with the $1–2 you’d earn from $1,000 in the same bank’s regular savings account. If this dividend of $50 is reinvested into more shares then the next year you compound your return by earning 5% on $1,050 – i.e. your original $1,000 plus the dividend of $50 – so you’d earn $52.50 next year in dividends.
Pretty powerful stuff.