Why do rich people have more money?

I hardly keep in touch with friends from my school days. Actually, I hardly keep in touch with anyone apart from family and a handful of closer friends. 

I grow more reclusive as I age and, honestly, I rather like it this way.

So, when I received a call from a friend whom I have not heard from for more than 10 years, it was more than a surprise. I was momentarily stunned.

What do you say to someone whom you have not kept in touch with for so long other than the usual "How are you?"

The last time we met, we chatted over a meal and he was doing pretty well. I remember joking that he would be able to retire very soon. To that, he said: 

"I can't retire soon. Rich people need to make more money because they have more things to spend on."

I was somewhat taken aback and asked him why he said that? What did he spend his money on?

He started counting the items using his fingers and I cannot remember all the items but I remember "a big house and two cars" being on the list. 

Then, I also noticed then that he was wearing a luxury watch. His clothing and shoes were also probably from some luxury brands but I wouldn't know, would I?

I also remember that I felt somewhat self conscious then with my outfit (not Boss but Bossini). 

Poor AK was psychologically scarred. 

I wasn't financially as comfortable back then and was trying hard to build my wealth like I was doing most of my life.

What this friend said back then reminded me of what another friend said to me before:

"It is not enough to be rich. You must appear rich."

Now, at the ripe old age of 45 and with what I have achieved, I can confidently tell these friends that they are wrong. They are so wrong.

Oh, you want to know why did my friend call me? 

Oops. I am growing forgetful in my old age?

Well, after some small talk, 

"Er... Could you loan me $50K?"

I was so stunned like vegetable. I kept quiet and he went on to explain.

Apparently, his business is not doing well and he exhausted what savings he had. There is no way for me to know if he was telling the truth or not and this is someone whom I have not been in contact with for more than 10 years.

So, what was my answer?

I offered him $2K, saying that I was not comfortable to lend him any amount larger than that. 

He hung up.

Rich people don't have to make more money because they have more things to spend on. 

Rich people have more money because they spend on less things and spend less on things.

I shan't say anything else but you might want to read the related posts below for my thoughts on "being rich" and "lending money".


Related posts:
1. If we are not rich, don't act rich.
2. Lending money? Ask questions.

15% to 20% yield per year but only for some.

Hi AK,

Been a regular reader of your blog. Simply inspiring to me.

I merely have one question to seek your advice. I have approximately $30,000 of current liabilities (namely credit lines and long term debts) or what some would call unhealthy debt. 

I also have approximately $13,000 of assets in stock holdings. If it was you, would you liquidate your 6% to 7% yield assets to pay for debts that cost 15%-20%?

From an economical reason, it makes sense to ensure that you forked out as little money as possible to pay the cost of debts. 

However, spiritually, I was wondering if I ought to keep my yield generating assets in order to "force" myself to work harder to upkeep the debt and buy more assets.

For now, my job does pay me enough to meet my debt cost and investment capital. 

Would you do the mathematically smart thing and pay down the debts asap or build up the asset at the same time?

Hi J,

Compared to a 6 or 7% yield, if you were to pay off your debt, it is equivalent to generating 15% or 20% in extra money per month. This is money in the pocket.

"Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying 18 percent." 
- Charlie Munger

What about being forced to work harder and all that? 

Be pragmatic. There is more certainty in money saved now than money to be earned in future.

Gambatte! :)

Best wishes,
AK

Related post:
An unbeatable level of certainty in wealth building.