Rich People Don't Keep Their Cash Here—And Humphrey Yang Explains Why

The rich people view money differently from everyone else. They regularly invest money and let their cash grow over time. There's more to becoming rich and wealthy than saving money. You also have to put it in the right places to build your nest egg.

Financial personality Humphrey Yang recently explained a key trait that sets rich people apart.

"They would rather have their money work for them," he said.

While rich people often enjoy work, these same people want to make more money from investments than from their salaries. Yang outlined how you can do the same.

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The Power Of Compound Interest

Yang explains that when your investment grows, the returns you generate fuel additional growth thanks to compound interest. If you invest $1,000 and earn 10% per year, you earn $100 at the end of the first year. Your $1,000 would then turn into $1,100.

However, if you maintain a 10% annualized return, your portfolio won't go from $1,100 to $1,200. Since you started with a $1,100 balance, you will now gain $110, resulting in a $1,210 portfolio. 

Applying this same model with larger numbers demonstrates how quickly your portfolio can grow over time. For instance, a 10% return on a $1 million portfolio nets you an additional $100,000. That's a higher return than the average salary. It's possible for your investments to outearn you on the side, but you have to grow your portfolio over time to reach this point.

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Prudent Financial Management Goes A Long Way

Compound interest won't do much if you only have a $1 portfolio. You won't see it go from $1 to $10 in your lifetime if you rely on 10% annualized growth. That's why it is important to monitor your finances, trim your expenses, and put everything you save into assets that can multiply your wealth.

If you get a 100% return on $1,000, you end up with $2,000. However, getting a 10% return on $1 million results in an extra $100,000. It's nice to get high percentage returns, but those gains won't do much good if you have a small portfolio.

The great thing is that the more money you put into your portfolio, the easier it is to reach new milestones. Getting the first million is the hardest part, but it then becomes much easier to reach $2 million. Jumping from $2 million to $3 million is much easier than jumping from $1 million to $2 million. It's even easier to go from $9 million to $10 million compared to the other jumps mentioned earlier. Wealth compounds on itself and makes every milestone easier to achieve.

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Don't Stash Your Money In A Savings Account

Most rich people do not stash their money in savings accounts due to their low returns. Not only is interest low on these accounts, but interest is also treated as ordinary income for tax purposes. 

You can earn a much higher long-term return if you put the money into index funds, real estate, and other assets. Index funds are easier to manage since you just have to put money into a fund, and the manager handles the rest.

It's still good to have some money in a high-yield savings account to cover emergency expenses. It's a common recommendation to keep up to six months of living expenses in an emergency savings account. Once you reach this threshold, it may be a good idea to put any remaining cash into investments.

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