In order to become financially wealthy, you have to attain money and/ or assets.  The only way to attain money and assets is by making money and not spending it all.  If you spend everything you make, then you can’t attain wealth.

There are people who have generous pensions.  They could claim to be wealthy.  As long as the entity providing the pension is solvent and keeps paying, then it is a legitimate form of wealth.  But a person obviously had to have worked (or at least been a time server at work) to get this pension.

If you see someone driving a Lamborghini, it doesn’t necessarily mean the person is wealthy. It is a possible marker of great wealth, but you really don’t know.  Maybe the Lamborghini is the only significant asset that the person owns. Worse, maybe the person has a big loan against the car.

Meanwhile, there are people that you see who are wealthy and you might never know it just by looking at them.  This was one of the key points in the book The Millionaire Next Door.

The problem that many people face is that they associate wealth with things.  This would be fine if it were the right things. The things that make people wealthy are income-generating assets, and to a lesser degree, appreciating assets.

If you see someone who is rich who is living in a big house and driving a fancy car, it is important to realize that it is not having these things that makes the person wealthy. He may be able to afford these things because he is wealthy.

If anything, the big house and fancy car are a drain on the finances.  You not only have the high price tag for these things, but you also have the maintenance costs that go with them.

Someone might think that in order to be rich just like that person, they need to buy a big house and a fancy car.  But unless the person has a really high income, it probably won’t be sustainable if it is possible at all.  And even if it is sustainable, then the person may end up with the car and house but little else to show.

This is really the typical American in a lot of ways.  They go to work, buy a lot of things, and are constantly stressed out. Every time there is a promotion or bonus, it is used to buy more stuff.  The stuff is typically in the form of a depreciating asset. It is rarely an income-generating asset.

You Get Rich By Collecting Interest, Not Paying It

This is a theme I have to return to once in a while.  It is so simple, yet it is not widely followed.  Some people seem to not even understand it, or they don’t want to understand it.

If you are going to become wealthy, you have to collect interest.  If you are paying interest, then you are most likely going to stay poor.

When I use the term “interest”, this can be any form of income from an asset.  It doesn’t have to be interest from a money market fund or a savings bond.  It could be dividends from stocks.  It could be rent collected from investment real estate.

If you are borrowing money for anything that does not enhance your income generation, then you are paying interest down a drain.  You are making someone else rich.  If you are continually paying interest for depreciating assets, then you will likely stay poor.

People who collect interest are getting ahead.  They are the ones who can become wealthy, or at least wealthier.

If you are borrowing money for a big house to live in, then this will not make you rich, unless you get lucky with a lot of appreciation over time.  Even then, you would have to sell the asset and keep some of the money in order to actually make anything.

On the other hand, if you borrow money to buy investment properties that give you a positive cash flow, then this is a possible road to wealth.  You are paying interest on your loans, but the money you are collecting from rent far exceeds this.  So, on net, you are collecting more than you are paying.  And once the mortgage is paid off on an investment property, then you will really be collecting.

This is why you should try to avoid almost all debt.  Even when it comes to real estate, you should try to limit the amount of debt you take on for a place to live.  It is a consumption item.  It is filling a need because you need shelter, but most people buy much more than a basic shelter.  Either way, it is still a consumption item.

If you eat out at a restaurant, this is consumption.  You have to eat to live, but it is still consumption.  You could have cheaper consumption by buying food at the grocery store and preparing it yourself.

Just keep this in mind in your daily life.  There is nothing wrong with spending money, even beyond the basics.  But it is a good idea to make intentional choices.

Take a look at the assets that you own.  Are they appreciating or depreciating?  Do they generate income, or do they cost you money to own? Or do they just sit there taking up space?

Look at your assets and liabilities.  Where are you paying interest to someone else?  Is it just a mortgage?  Do you have a car loan?  Do you have student loans or credit card debt?

Do you have anything that is generating cash flow for you?  Do you have a retirement account?  (These can lose money too.)  Do you have any investment real estate?  Do you have any royalty income or a side business that generates extra income?  Is there anything you can purchase that will generate money instead of costing you money to buy and maintain?

In order to get wealthy, you have to not spend all of your money on things that do not appreciate and do not generate income.  If you are continually just buying non-income generating stuff, you won’t get wealthy.  If you are borrowing money to buy this stuff, you certainly aren’t going to be wealthy.

If you want to be wealthy, then find ways to collect interest (i.e., income generation). If you are paying interest, then you are making someone else wealthy.