Takes money to make money: The Formula for getting rich (the one that works)

top of the mountainThe Formula for getting rich is NOT about compound interest, internet business, multi-level marketing, FOREX trading, stock options, real estate, mutual funds or starting a business. Getting rich through saving and “the magic of compound interest” would take ages. Internet business is not for everyone. MLM (multi-level marketing) is a scam. FOREX trading is more about chance than about skill. Real estate requires a huge up-fron investment. And starting a business has less than 5% success rate.

Yet there are rich people in all those fields. There are real estate millionaires and guys who made fortunes off FOREX. But you can’t wrap your head around how they made it, exactly. Did someone help them? Or was it just the plain old “hard work and a little luck?”

Well, the truth is, it doesn’t matter which path you choose. All that matters is how prepared you are when you set foot on your path of choice. So actually, it doesn’t really matter whether you choose real estate or business or FOREX trading. All that matters is how you’ve lined up your pawns.

Here’s what I mean.

The Formula for Getting rich, stage 1: you need money

No matter what they tell you, you need money to make money. If you invest pennies, you get pennies in return. You invest dollars and you get dollars in return. If you want to make thousands, you have to invest thousands first.

(Okay, sometimes you strike a great deal where you invest pennies but end up making thousands. Like when you invest a dollar to buy a lottery ticket and make a million by hitting the jackpot. That’s pure luck. Or when you invest pennies in hosting and start a blog and it goes huge… that’s also luck. So don’t take Facebook and Google as the rule because they really are exceptions, and I think that back at the time when he was coding Facebook, Mark Zucherberg didn’t expect it to turn into the huge hit that it is.)

Accumulating enough money is the hardest part of The Formula for Getting Rich, because it takes the most time. Maybe several years, or – depending on the hand life deals you – maybe a decade.

But how much money is “enough” to get you started on The Formula for getting rich?

Well, the higher your definition of “rich,” the more money you’ll need to get things rolling. Can you start by investing $2000 and make $50 000 off of it? Hmmm I doubt it. But what if you start by investing $200 000, turn that into $250 000 and clear a profit of $50 000? Much more likely.

However, most people don’t have 200k, which is why most people can’t get to earnings in the scale of 250k and clear 50k in profit. Most of us just operate in the scale of $200 (two hundred bucks) and so whatever we earn on the side is in the scale of $250 in earning or $50 in profit.

That’s why they say It takes money to make money. And if you don’t have it, you need to start working on it.

Some will say that not having money is not really a problem. You can always get a loan, right? But the catch is, if your investment fails and you can’t pay back the loan, you’ll be in trouble. I think there are plenty of horror stories with that script.

Besides, saving up is better than borrowing because when you save, you have interest working in your favor; and the more you save, the more you earn in interest. But borrowing is exactly the opposite – interest works against you; and the more you borrow, the more you get penalized in interest.

There is, however, one drawback to saving: it takes a lot of time. And sometimes, you don’t have a lot of time – sometimes an opportunity presents itself only for a short window of time and it won’t sit around and wait for you. So obviously, it would make sense to go in debt to seize the chance, right? WRONG! What would make sense is that you start saving in advance so that you always have a pile of cash ready whenever a money-making opportunity presents itself. (That’s how the Jews do it.)

And does saving money really have to take a long time?

Well, how much you can save depends on how much you can earn. If you work for minimum wage, saving up 20k will probably take you decades. But if you work for 120k a year, you could have those 20k in just a few months.

Suppose you’re minimum wage and you’ve worked 2 years to save up 5k. Suppose you invest that money into something and it fails… bam, you’ve just lost yourself 2 years of your life. That hurts. And it’s scary, right? That’s why so many poor people are afraid to even try and start a side gig or make an investment. It’s just too big for them.

But suppose you make 120k a year and you save up 5k in just two months. Suppose you invest that money and you fail miserably… well, big deal! You’ll have that money again in just two months.

That is why increasing your current income is vital for getting rich. But how do you increase your current income? Well, the most obvious answer is: through your job. That’s the safest and easiest route. (Which is made even easier if you can negotiate a higher starting salary as early as the interview stage.) Other options for increasing your current income are getting a second job or starting a side gig (freelance writing, repairing cars on the weekend or buying in bulk to later mark up and re-sell… you pick).

But beware: increasing your income will only make a difference if you increase your savings along the way. After all, it’s not about how much you earn; it’s only how much you can retain that matters. It’s better to earn 5k/month and save 1k than to earn 12k/month and spend it all away.

The Formula for Getting rich, stage 2: you need friends

Always, always be looking to make more friends. Be open to meeting lots of people. Befriend those whom you like and build a respectable relationship with those who are powerful and whom you respect.

Don’t wait to start doing this until you have money and need contacts. Just like saving, you need to start early so that when the moment comes, you already have the friend or contact you need.

Don’t filter or judge people by their current job, nor by how much money they make now. No one knows where they’ll be in ten years.

My aunt works as a housekeeper. She’s not rich, influential or even educated. But she has the biggest heart in the world and is always trying to help someone. She’s not powerful herself but she knows some powerful people with lots of money – she’s in their homes, she babysits their children. If my aunt was your friend and if you asked her if she knows someone looking for English lessons, she could put you in touch with the rich guys who need tutors for their children but who don’t want just a random stranger in their home, even if that stranger is the best English teacher. They want someone they can trust. And if my aunt would mention your name to them, you could easily land a side gig that makes you more money than the average going rate. Not only that, but you’ll also get your foot through the door for access to a circle of rich, powerful people.

See what I mean?

Friends are also very valuable because there are things – favors – you can’t buy with money. Some things are only available to you through someone’s good will. That’s when friends come in.

Finally, by trying your best to make a good impression and do good things for so many people, you will inevitably build yourself a great reputation. You reputation will preceed you and help you in such unexpected ways you can’t even imagine yet. But trust me, it will.

Getting rich, stage 3: finally start making money

Now that you have lots of cash available (through Step 1 of the Formula) and you have lots of friends available (through Step 2 of the Formula), you’re… a person of power.

All you have to do from here on is to choose how you want to make money – are you passionate about real estate? Or maybe you’ve dreamed about a charming coffee-shop in the heart of the town? You can choose actively or wait out for destiny to giv e you a sign.

But in any case… the road before you is clear now.

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10 thoughts on “Takes money to make money: The Formula for getting rich (the one that works)”

  1. There is a game called “Cashflow” and it is very educative about the first part of the formula.
    One must work hard until the money from passive income are enough to cover your expenses. When this happens that is the time for making big plans.
    Why is this?
    1. You now have the choice what to do with your time. You may switch to half-time work and use the spare time for building your business or spend more time with your family and so on. You don’t depend on your salary anymore, so you may do what you want to.
    2. You have the choice what to do with your salary – you are now free to risk your entire salary and invest it in your business, because you don’t need it anymore – the passive income will cover your expenses anyway.
    3. You have learnd to make secure investments. How much are your expenses? 400 levs per month? Or 600? Or 1000? In order to have a 500 levs income per month, you have to invest about 120k if your profit is 5% per year. While doing this you have learned how to invest wisely, save your money and so on.

    In fact 20k is not enough. It is enough to seize the opportunity, but most people wouldn’t do it, because the risk is too big. But if you have a 20k and passive income to cover your expenses, this is not so great risk.

    But how much time will it take? If you can save 100 levs per month it will take you 36 years to save 120k even if you have 5% interest and nearly 12 years to save 20k. Both are too much. And this is without counting inflation.
    What about saving 200 levs per month? It will take you 25 years to have 120k and 7 years for the 20k. It’s a little bit better.
    In order to have enough savings in reasonable time, you need to save 500 levs a month!!! Then it will take you 14 years for the 120k and only 3 years for the 20k.
    BUT!!! If you can afford to save 500 levs a month, and have 500 levs expenses, this means that you are making more than 1000 levs a month as income. Most people in Bulgaria make under 500 levs a month. Even if they cut down their expenses, they can’t save more than 100 levs a month. And it will take them decades till having the minimum to start building their own thing. At the same time all banks and shops advertise the “buy now, think later” way of living, so people tend to spend more than they earn instead of saving their money.

  2. I couldn’t agree more – you need money to make money.
    The keypoint is that you need somebody else’s money to get rich.

    If you follow the path of saving – you won’t be much better up than your peers in the same social group. OK, let’s say you are really a talented business person and manage to get 20% ROI. You put your hard saved 50k into business and get 10k a year on top. OK, this is good. Don’t forget that at this stage you have probably left work and cater now for yourself. You used to save 20% of your work salary – and now you get 20% back from your invstment as profit.

    Lets say S is your salary and X is the number of years you have been saving up.
    (0.2*S*X)*0.2 = S

    X = 25

    To run this scheme, you have to save for 25 years (ok, 20 years if you consider the interest). 20 years of savings to be able to run (successfully) a business that pays you th esame amount like your current salary.

    Pratically – this is what exactly happens. Millions of small coffee shop owners, hairdressers, flower sellers, etc – they use their life savings to make enough money to live off.

    To get rich you need to use other people money as leverage. No other way to go about it.

    It is not so easy of course, you need to become a trusted person, demonstrate experience in running businesses or any other kill that may convince the potential sponsor, that you’ll do a good job.

    Coming back to you examples – if I am earning $200k a year, I have absolutely no interest in runing a business with 10k initial investment. Somebody else however, can consider 10k to be huge and can be wiling to go 50/50 in business with you as long as you sponser him. Same applies upwards – if I want to start a business, I may want to invest 1M, so I get my 200k out of it as profit. There are people/firms to whom a million is almost nothing.

  3. Absolutely. Your last paragraph is – unfortunatelly – very true. When you earn little, you can only save a little, and at such a rate one lifetime is usually not enough for you to advance to the next stage. *sigh*

    Which is why my husband and I have decided to focus on earning and saving as much as we can, and maybe start investing first rather than jumping straight to starting a business. (Besides, I have to wonder if 20k is even enough to start a business…)

  4. Andy – “The keypoint is that you need somebody else’s money to get rich.” – what do you mean? (I think Kiyosaki had a consept with a similar or identical name.) Yes you can always get a loan, and even big loans in the range of 50k are no problem if you use your home as collateral. The problem is what happens if you fail and lose all that money. Then you are in a worse situation than if you had saved and lost your savings.

    You are right about this: “You have to save for 25 years (ok, 20 years if you consider the interest). 20 years of savings to be able to run (successfully) a business that pays you th esame amount like your current salary. Pratically – this is what exactly happens. Millions of small coffee shop owners, hairdressers, flower sellers, etc – they use their life savings to make enough money to live off.”

    As for “There are people/firms to whom a million is almost nothing.” – yeah, so? :) That doesn’t help us rat-racers.

  5. PS I have no idea why you guys get held up for moderation each and every time you post. I don’t even get notified that your comments are caught in spam.

  6. As for moderation, go to the settings menu and “Comments” item.
    Check the box “The author of a comment must have a previous accepted comment”
    This should do the trick.
    Personally I’m sometimes commenting from home or from work, so this may be the reason, the system doesn’t recognize me.

  7. As I understand the idea of Andy, you get some money and the person who gives you the money takes half of your profit. If you lose they lose their money.
    But as I see the things, in this way the business is not yours really, so what is the difference than working for someone else? It’s the same if you take a bank loan. The bank takes a fixed amount of money for using their money and it doesn’t matter if you win or loose.

    Look for example at the MLM companies. They attract people by advertising that the people will have their own business. But is it really their own?
    No, it isn’t.
    Each consultant has a contract with the company. They have a hierarchy, but you can’t sell non-company products in your network. And you have to do a lot of work, to earn some money. If you leave the company or the company goes bancrupt, you can’t take “your business” with you.

  8. Rya,

    I meant that there is a hierarchy of wealth and if you need money to invest, you normally go to a person who is wealthier so they invest in your idea (ok, crowdsourcing is a modern day exception to this).

    About the big loans and failing. True, if you fail you can loose your collateral or have a lot of pressure repaying the loan back. This is why no serious enterpreneur takes this route unless they are 100% sure they can make it. Hence the reason why so few people do business as well. Don’t forget that it is also in yout lender’s interests to help you out as much as they can in your venture – they do not normally want you to fail. (unless you’ve taken a loan from the mafia, of course).

    This is exactly why in most democtratic coutries, th erisk of failure (insolvency) is a part of the game. It is calculated in the loan rates and the collaterals or insurances you have to take. Banks do not want you to go fail, but at the same time they understand that people go bankrupt occassionaly and it is a part of life. This allows businesses to die and although your financial profile would not be good for years if you declare insolvancy, no body will break your legs or put you into jail. You can get on with your life and after a while can even try to start another business.

    Yes, you are right, other people’s money would be familiar to you from Kiyosaki (or rather his accountant Michael Letcher), but it is widely used in the business world. The idea is you inveite investor to join you and share the risk of your new venture – in return they get a share of equity.

    Translated to your case – if you want to open a clothes shop – find an investor (some one who’s richer than you at least), who will go in as your partner and invest 20-30k. If you fail, you both fail, you’ll be left with no debts, only some broken confidence.
    This ishow I started all of my businesses – either a loan from the bank or with partnering with an investor. Investing your own saved cash is really difficult, trust me – both emotionally and quantative.

  9. @Todor – thanks, I had this set up a long while ago, and yet!

    @Andy – sure, getting a partner on board is a possibility, but I don’t think anyone would fund your business 100% without you putting in at least 50% as well. What kinds of businesses have you started?

  10. MAJORITY OF THE PEOPLE:
    Don’t understand how money works
    Earn low rates of return and pay too much tax
    live from paycheck to paycheck
    live on the edge
    Spend not save
    caught in the high interest debt trap
    retire in poverty

    MINORITY OF THE PEOPLE:
    Plans for future
    Put their money to work for them
    have their money professionally manage
    have emergency fund to shield from financial storm

    HOW WE SPEND OUR MONEY MATTERS!

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