How Did the Wealthy Get Wealthy? Can I Copy Them?

In a recent video, I talked about who the poor & wealthy are and how did they get there. 

Today, I’m diving deeper into one crucial aspect: how the wealthy became wealthy. 

Can their strategies work for you?

Over the years, I’ve seen the full financial picture of thousands of Canadians and read countless studies on wealth building. 

While my clients are generally higher-income, growth-focused individuals who work with a financial plan, I’ve also spoken to countless others—through this blog, in person, and within my network of wealthy individuals. 

These insights have given me a clear understanding of who achieves financial success and the steps they took to get there.

In my latest video, podcast episode, and blog post, you’ll learn:

• How much do you need to be “wealthy”?
• What types of people have high net worth?
• What is a “productive growth asset”?
• Do you have to borrow to invest to become wealthy?
• What does the Lifecycle Investing study tell us about growing wealth?
• How can you copy their methods and become wealthy?

How much do you need to be “wealthy”?

• Having investments that will provide comfortably more than your desired lifestyle if you choose not to work.
• 20% more than your financial independence goal is the margin of safety. Let’s say “wealthy” is 50+% ahead of your goal. Enough that you don’t have to worry about money.
• Most people, this is $2.5 to $5 million in investments (excluding your home). Many are higher or lower.

What types of people have high net worth?

• Wealthy are mostly older people that saved & invested effectively through their life.
• Very few inherited it. 13% of Forbes 400 richest.

o               Most inheritances are received in your 60s or 70s. Too late to grow it.

o               Most parents want to enjoy their life and not leave a huge inheritance.

• Almost nobody won it in the lottery. (Odds are against you.)
• Almost all millionaires and billionaires made it all themselves.
• Wealthy people grow it through investments or a business.
• High income is helpful, but not essential. “It’s not what you make. It’s what you keep.”

o               High income comes from learning a valuable skill. Some (not all) university degrees (such as STEM fields like IT or engineering) or sales or trades. Or skill as an entrepreneur.

• Wealth builds with age. The wealthy are mostly older people, say 50+, who saved & invested over the years.

Great news! You can do this! Just save a good amount & invest for growth for the long-term.

What is a “productive growth asset”?

Investments should be productive growth assets – Good return that is reliable long-term, significantly more than inflation in assets that you will use for your lifestyle in the future.

• Top 20% (not top 1%) in net worth is mostly their house for many people. Your house is not a productive asset, unless you will use it for your retirement income in some way:

o   Sell it & downsize to much lower cost home or rent.

o   Borrow against it to invest. E.g. Smith Manoeuvre.

o   Borrow against it to spend.

• Build your net worth of productive growth assets – excluding your home.

o   Wealthy are growth investors: Stock market (equity) investors, business owners or investors in leveraged real estate (always with large mortgage). Real estate with a large mortgage can be a good investment, but paid off rental properties are usually low return & high tax.

o   Equities (stock market or businesses) are the highest growth asset class. Equity investors & business owners both invest in businesses.

o   Example of wealth over 40 years in stocks vs fixed income (bonds) vs real estate. Growth of $52,800 (average house in Toronto) in 1974 is just over $1 million now in real estate, $825,000 in fixed income, but almost $10 million in global stocks:

• The stock market has been reliable in history over long periods of time. It is an investment in businesses that tend to grow their profits over time.

• Save & invest for growth for the long-term.
• Save a healthy amount & get a decent return on your investments.
• For long periods, like 30 years, include inflation. You need purchasing power to afford your lifestyle.
• $1,000/month can get you to $1 million after inflation – probably not wealthy.

• $2,500/month can get you to $2.5 to $5 million after inflation – which could be “wealthy”.
• $2,500/month is the RRSP limit for people with a higher income.

Do you have to borrow to invest to become wealthy?

• No. Saving & investing for growth over the long term can make you wealthy.
• However, the highest net worth people usually did significant borrowing to invest.
• Nearly all very wealthy people borrowed to invest in investments or their business. For example, the Smith Manoeuvre or investment loans (e.g., 3:1 investment loans) for investors, a business with large loan, or real estate with huge mortgage.
• Example of wealth for people that leveraged vs. no leverage.

o               Invest $4,167/month for 30 years: Investments $5,869,000.

o               Borrow $1 million to invest and pay $4,167/month interest for 30 years (30% tax bracket): Investments $20,825,000 (net of loan).

o               Investments are 4 times higher with same cash flow.

What does the Lifecycle Investing study tell us about growing wealth?

• Study by 2 Yale professors is about saving for retirement the same way you buy your home. Borrow as much as possible when you are young and pay it off by your mid-50s and move to your target asset allocation by retirement.
• Study showed that 100% of the time this has created more wealth than the normal bit-by-bit savings most people do.
• It works because you start with a large investment portfolio when you are young.
• Reduces “last decade risk”. If you invest for 40 years from age 25-65 and your investment returns are low in the last decade from age 55-65, then your 40-year return is low, because nearly all your investments are held in the last decade. Your rate of return the first decade from age 25-35 is almost irrelevant, because you have hardly any investments then.
• Conclusion: When you are young, having large investments is what matters much more than your rate of return. To build wealth, try to get as much money invested as possible when you are young and it can grow for 40 years – even if you have to borrow it.
• Note: this is not for everyone. Only for growth-focused people that want to focus on being wealthy and who will stay invested for the long term.

How can you become wealthy?

• Wealthy are mostly older people that saved & invested effectively through their life.
• Great news! You can do this! Just save a good amount & invest for growth for the long-term.

1.             Get a Financial Plan, so you know what “wealthy” means for you.

• Know how much you need to save & return you need to make.
• Keeps you focused on the long-term. Avoid short-term mistakes.

2.             Wealth builds with age. Invest as much as possible when you are young.

3.             Save & invest early. Benefit from 40 years of compounding.

4.             Invest in equities (stock market investments), a business, or real estate with a large mortgage.

5.             Borrowing to invest (leverage) into equities is the most effective growth strategy if done by the right people in the right way over the long term. Lifecycle Investing study is an example of how this can work over decades.

Ed