We’ve all heard about how “the rich get richer.” Smarter people than any of us have marveled about how the rich seem to get richer even during times of recession.
How is that possible? When the rest of the economy is contracting, how do wealthy people keep expanding, seemingly in defiance of gravity?
The best way to explain it is that the rich understand, better than most of us, that money is inherently an illusion. It can either expand or contract, relatively at will, depending on what kind of illusionist you are — what magic tricks you do. This is especially true in economic hard times.
So if money is an illusion, and what matters is what tricks you do with it … what rich-person money tricks can we all copy so we can protect and grow our wealth during economic downturns?
1. Invest In Appreciating Assets
Middle-class people tend to use money to buy toys. Cars, watches, clothing, gadgets … what Robert Kiyosaki referred to as “doo-dads.” But when you’ve bought every toy … what else is there to buy?
Rich people exercise “retail therapy” by buying appreciating assets like gold or real estate. They enjoy buying it the way a shopaholic enjoys checking out at Nordstrom.
And they aren’t looking for a 3-6 month profit. They take the long view — something they will allow to appreciate for 3-5 years minimum before they sell. They enjoy owning it. The longer they own it, the longer they have made the illusion of money into the reality of a hard asset.
2. Use Leverage
Leverage is a fancy way of saying “Let’s buy this with other peoples’ money instead of our own.” When it’s a credit card at the shopping mall, this is a dangerous way to get into a financial hole. When it’s using debt to accumulate appreciation assets, it can be extraordinarily powerful.
The best-known example of leverage is using a mortgage to buy real estate. Let’s say I have $100,000 cash, and I find a house for $100,000 in a market that appreciates 3% per year. If I use all of my cash to buy that house free-and-clear, by the end of the first year it will be worth $103,000. My net worth went up $3,000.
Now let’s say I use leverage. Instead of using all my cash for one house, I divide it into four and make down payments on four houses. At the end of that first year, my net worth had increased $12,000, not $3,000. Yes, the mortgage payment eats into that a little, but not nearly enough to erode the benefit.
Wealthy people have access to incredible leverage due to their net worth and connections … but the home or investment mortgage is special because it’s within reach of most people with reasonable financial fitness.
3. Income-Generating Assets
The rich are always giving themselves raises — but not like Congress gives itself raises. Rich people increase their income by choosing assets to buy that generate income. Cash-flowing businesses, promissory notes, and — most relevant to us — rental real estate.
Here’s the secret — the amount of cash flow doesn’t matter as much to them. Consider the recent interest-rate hikes. In a higher-interest-rate environment, cash flows are going to be smaller.
But for the rich, even small positive cash flow is worth having … if it’s an appreciating asset. As long as the asset pays for itself, why not? Appreciation will eventually pay off. Meanwhile, every small amount of cash flow is contributing to financial freedom — enough passive income to cover all personal expenses without having to work.
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MartelTurnkey investments are three-for-three — appreciating, income-generating, and leveraged. If you want to prosper in the next recession like the rich do, reach out to us and let’s make your next asset acquisition easy.
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