The rich don't work for money,they make money work for them

What is the difference between making money work for you and working for money? In first case where individual makes money work for him/her, s/he becomes master of money. In second case where individual works for money, s/he becomes slave of money and money becomes his/her master. Well known fact is that money is a very good slave but extremely poor master.

How can one make money his/her slave? Simple, by regularly saving and investing. Whenever you earn, first pay yourself. Invest at least 10% of your gross income. Over a period of time your investments will grow and start generating returns. Soon you will reach a stage where return from investments are enough to take care of routine expenses. Moment you reach that stage you are on fast track. Your investment will generate return to take care of your life style and your fresh new earnings will increase your investment corpus. Now you are not working for money. Your investments are working for you. Money is your slave and you are its master. Remember one golden rule in life, earn-save-spend. People who follow this will eventually make money their slave.

There are other set of people. They first earn than spend and lastly save. They will always remain slave of money. When they earn more they spend more. If they do not earn more they probably will borrow. People who cannot control expenses and save become slave of money. They will have to keep working for money whole of their life.

In first instance people are working for themselves. Whatever they earn they save for themselves. From their savings they further generate returns for themselves. Second set of people work for others. When they spend on goods and services, shopkeepers and service providers earn profit, so they are working for them. If they borrow money, they pay interest. Interest paid by these people is income for someone else and hence they are earning for the lenders. These people even end up paying higher tax. This is because all governments give tax benefits to savers, no government gives tax benefit to spenders. Being spenders first they work for paying taxes. After paying everyone, if there is any surplus left they are able to save or should we say spend??

Another important thing rich do is to create assets. Others create liabilities. Definition of asset is different for financial planning perspective. Any cash outflow which has potential to generate returns either immediately or in distant future is an asset. Rich invest in income generating assets. On the other hand majority of people create liability. If any of your outflows are likely going to result in spending either now or in further future it is liability. For example when one invests in fixed deposit s/he will generate income by way of interest and hence it is an asset. On the other hand if one buys car, s/he is likely to further incur expenses by way of fuel, maintenance etc and hence from financial planning perspective car is a liability.

Often people struggle even after earning more or getting pay hikes is because they would have created lots of liabilities. They would continue working for all those liabilities (READ: Others.) Rich create lots of assets and make those assets work for themselves.

An investment is like sowing a seed. Initially you need to water it but soon it starts fending for itself and grow. The rich sow seeds of assets and later make the assets work for them. The others sow the seeds of liabilities and work for them.