Sunday, June 8, 2014

What Billionaires Know

What Billionaires Know

Since I spend so much time talking about The Millionaire Mindset, it's only appropriate that I discuss what wealthy people understand about finances--and about life!

Image from a blog post at arlinghaus.typepad.com

The people

Many well-respected, 'self-made' billionaires, like Warren Buffett and Bill Gates, believe that their children should earn their own way in life. Obviously some rich people, like Richard Hilton, father of Paris, do not share this idea. But it is generally true that people with lots of money understand how to manage it--and that includes not giving your children a blank check.

Warren Buffett, the most famous investor in America, is one of the richest men on Earth, with a fortune estimated at $30-40 billion. But he committed not to give his kids money.

Instead, he promised that his three children will receive no inheritance, aside from stock purchased from the sale of their grandfather's farm (less than $100,000 worth of stock apiece in 1979--which still would have been enough to buy a nice house). He also paid for the education of his grandchildren, but was notoriously stingy otherwise. For example, when a granddaughter wanted help buying a futon for her apartment, he responded with "You know the rules: school expenses only."

Bill Gates has a similar approach, saying that it wouldn't be good for his kids, or for society, if he just handed his money to them. Instead, he established a well-known charitable foundation, the Bill and Melinda Gates Foundation, and pledges to give away most of his fortune to philanthropic causes. In fact, Gates has convinced other prominent billionaires to join him in his pledge to give away at least 50% of their wealth.

The perspective

Clearly, both of these men believe that wealth should be based on work and on merit, not on the randomness of the genetic lottery. Along these lines, one of Gates' more well-known quotes is the simple axiom, "Life is not fair; get used to it." This is an important point, which will be revisited in more depth later in this post.

Gates also pointed out that it's important to cultivate a sense of achievement in your children; so they will know how to handle failure and be motivated to work on their own accomplishments.

In justification of his plan not to leave his money to his son, Jackie Chan said, "If he is capable, he can make his own money. If not, then he will just be wasting my money." Nigella Lawson, the famous chef, similarly asserted that "It ruins people not having to earn money."

These are not isolated cases, either: for Business Insider, Megan Willett compiled a list of 15 wealthy people, all of whom pledged not to leave their fortunes to their children.

At first glance, this may seem heartless. You may be thinking, 'These people are refusing to leave their wealth to their own children?!'

The idea shared by all of these wealthy people is the idea that money is earned. Wealth is created not only through hard work and discipline, but through smart investment and disciplined management of those earnings.

This insight is certainly nothing earth-shattering, but it is useful and responsible, and should inform our attitudes toward money. For many people, such as M.C. Hammer or Antoine Walker, this gem of wisdom was only obvious after blowing through many millions of dollars! Above all else, these people understand the effect money has on the human mind.

What they know

Wise wealthy people understand that when someone is handed huge sums of money, he won't respond, "Gee, now I better get up extra early for work on Monday!" They know that wealth, without investing your own time and effort in acquiring and maintaining that wealth, tends to breed laziness and entitlement.



They realize that when you have to earn your own money--or face the risk of losing the shirt off your back--you come to appreciate all the time, effort, and expertise that went into acquiring that money. This appreciation, in turn, encourages financial responsibility and grit.

You don't see successful entrepreneurs like Bill Gates and Warren Buffett throwing lavish parties, buying Bentleys and spending thousands at the clubs every weekend! Why? Because wealthy people know that it's irresponsible to waste money on status symbols. This knowledge is borne of the realization that any fortune can disappear in a blink; a realization that probably came from their experience building a company from scratch.

(On a related note, many entrepreneurs have failed at one or more businesses before experiencing great success. This experience--originally borne of bad judgments--was seen as a stepping stone, something to analyze and learn from. Their attitude toward mistakes is not one of dejection, but of determination).

What this means for you

A workmanlike philosophy like this won't make you a billionaire, in and of itself. But it will set you on the path to financial independence, which is a worthy and attainable goal. When you reach financial independence, you won't need anybody else's money, or favor, and you won't have to put up with a miserable boss, landlord, or anybody else.

Truly, money is power: therein lies the danger, because people are easily addicted to that power. That addiction, in turn, can cause people to act with disregard for others, in pursuit of adding to their already stuffed coffers. Hence, the apostle Paul's universally-misquoted comment in 1 Timothy, chapter 6, verse 10: "For the love of money is the root of all kinds of evil."

So my caution to you is, Don't let this happen to you. Money is a tool. Like all tools, it can be destructive if it's not put in its proper place. Wield the tool, don't let it wield you. 

 

How money works for them, not the converse

Billionaires also understand that wealth ultimately comes from wealth. Once you get money, invest it. Make your money work for you. People who get rich almost always do so because they create a business of some sort.

That is, they get money either through loans, or through investing their own money. They then use that income to build a business that sells a product or service. If that product or service catches on (smart, tireless marketing can help that happen), it will repay the initial investment many times over. Once this happens, these wealthy people invest their newfound profit into other money-making ventures.

Essentially, these people must do a lot of setup, research, planning, and so on, in order to make the original gamble pay off. In the case of these wealthy people, their good ideas were well-marketed (through effort and savvy) and well-timed (luck); the combination of skill and luck obviously paid off handsomely for them.

Once the initial success has been achieved, they continue to invest their money and effort back into the business, in hopes of making even more money. If the new ventures are successful, the multiple income streams can then be leveraged into even more investments. This is how people get truly wealthy. It's an inherently risky endeavor, and many hardworking people with good ideas fail due to any of a variety of factors.

But the same principle applies on a smaller scale--use it to your advantage! When you get money, don't treat yourself to a new car or lavish vacation--because once you spend it, it's gone. Instead, invest that money into something that can make you even more, like a stock portfolio, mutual fund, or real estate investment trust (TALK TO A FINANCIAL EXPERT BEFORE INVESTING! I AM NOT A FINANCIAL ADVISOR!). A well-planned and properly diversified set of investments will [hopefully] yield even more profits--without any extra work from you!

If you do this often enough (and successfully!), and you continue to live below your means, you can end up retiring from these investments if you so choose. Although it's not difficult to understand this principle, it's much more difficult to execute well. And, sadly, there are many people who foolishly waste their money because they never figured out how to capitalize on this principle.  Here's why:

The underlying foundation

The underlying key to making this work is self-discipline: the self-discipline to study how others achieved their successes, the self-discipline to set goals and craft a plan to achieve them, the self-discipline to adjust your plan if necessary, the self-discipline to overrule temptation, and the self-discipline to keep working--even when it's no longer necessary.

Self-discipline isn't easy, and it unfortunately takes months or years to yield visible results, unlike the instant gratification pitched to us at every turn. But self-disciplined people end up as the big winners because of their perseverance and planning.

I don't remember where I first saw this picture, but it can be found on ideaspotters.blogspot.com, among other web locations. 
It's very true, and very relevant to this section!

As the above quote implies, lots of people have a bunch of expensive junk that they have to keep working to pay for, because they lacked the discipline to just say 'no' to their desires. Self-discipline alone won't solve all your problems, nor will it make you rich. But you can't be rich without it, either--certainly not for long! Work on your self-discipline in everything you do, and you can increase your odds of success.

"Life isn't fair," says Bill Gates, the richest man on the planet. 

If you had a laugh at that subhead, good--you caught the irony before I bludgeoned you with it!

But that layer of irony is built upon a hidden foundation of truth. Gates would probably say that he was lucky enough to have the right idea, in the right place, at the right time, with the right people. He probably doesn't deserve to be the richest man alive any more than the next entrepreneur, but as he said: life isn't fair. The sooner you accept that, the better off you'll be.

People seem to believe that the world has to be equitable and even-handed. Everybody should be able to have a job, and hard work should always be rewarded. While this is nice in theory, the world has never worked this way, nor will it. Nobody is obligated to treat you fairly, least of all an abstract entity like 'Life' or 'The World.' This is why governments create laws to protect people's rights, and police to enforce the laws--because nobody else will.

Billionaires understand this truth, and that's why they continue to invest and diversify long after they've reached the point of financial solvency. They know that some disaster, natural or man-made, can wipe them out. They know that a competitor, or many competitors, will soon overtake and crush them if they don't continue to improve their product or service. It's very fear-driven, and rightly so: things change quickly! A wise entrepreneur takes this into account, and plans accordingly.

Now you know! Billionaires understand a lot more than just a specific industry, or how to sit in an office and tell people what to do. They have insight into human nature, and they acknowledge the unforgiving essence of life itself.

But you can benefit from this insight, and you don't even have to pay for it--now that's froogal! :)  It's difficult to implement, though, so get to work on developing that self-discipline: it's a lifelong endeavor!

Happy saving!


Catharine Symblรจme at Lifehack.org has an excellent post about a similar idea.