There are four types of rich people.
- The wealthy who are Asset Rich but Cash-Flow Poor. A large percentage of these are the ‘old money’, people who are born into riches or those who inherit large fortunes of money. They have large assets often earned over generations – properties, land, precious metals, antiques, paintings, alternate investments and stock portfolios, but do not have income streams proportionate to their ‘social statuses’. A more common member of this group are the elderly retired who own a property at a prime location.
- The wealthy who are Cash-Flow Rich but Asset Poor. Last couple of decades of economic prosperity and globalization of corporations have successfully created vast numbers of this ‘new money’ category of rich people all over the world. These are commonly, the corporate crowd that have a large income (thanks to their job) but have not managed to accumulate large assets yet.
If you are cash flow poor, chances are, you may have to liquidate assets to meet some of the curve-balls life can throw at you. If you are asset poor, consistency of your income stream is now the highest risk. Added to this, socially mobile people in general, have higher ‘costs’ to maintain their life style and statuses which surely doesn’t help to preserve their wealth.
So where do the other types stand?
- The third category, a small minority, have both large assets and large cash flows either by accident or by design and in general live sensibly, making them the most stable and uninteresting of the lot. They have tons of money, they know it and others know it. Money is no longer the driving factor in their life. This is the population of the Bill Gates and Warren Buffets of the world.
- The fourth and final category of rich are those who have balanced their – Assets, Cash-Flows and Life-Style Costs. In simple terms they have enough diversified assets invested to generate cash flows (income streams) needed to maintain their life style costs at all times. Having three levers to manipulate means that you don’t need to have millions of net worth to be ‘practically’ rich. This also means that if you are looking for external societal validation to define whether you are rich – this is not the option for you !
The fourth approach is surprisingly simple, because it gives everyone a fair chance or shot at becoming rich.
Which type of rich person can you realistically become in this life time?