How Rich People Stay Wealthy Even When They Go Bankrupt

Let me preface my answer by saying that I am not wealthy. Just recently retired, all of our plans were taking shape wonderfully. Then, COVID hit. So much for our first year of retirement. Now, in 2022, things are falling into place nicely, except for one thing – money. But we are fine. However, with the decline of stocks and other investments, it seems like a bad time to cash out anything invested. So, we are fine as long as we keep our spending and cost of living within social security and pension. That's not a lot of income but it covers most of the basics. So, not poor but kinda broke.

Anyone who is truly broke or poor would laugh at what rich people call broke! But I think there's probably a different definition of 'broke'. Rich people don't just keep all their wealth as disposable cash stored in the bank or under their mattress. They own various assets.

The Concept of Real Riches

Real riches lie in the mind and spirit. This doesn't go away, even if a person's liquid money is gone for a time. Rich people have their wealth spread out in different ways – sometimes through property, investments, or other long-term assets. Therefore, the concept of 'broke' for rich people might be different from the common perception.

The Essence of Investing and Liquidity

If a person puts all their wealth into property and lives off the rental income, they may run short if some tenants leave, and the building stands empty for a time. This is a lesson in the importance of diversification. Rich people have a broader portfolio, which includes various types of assets, such as stocks, real estate, and other financial instruments.

Investments come in many forms, and it's not the same as having disposable cash. Nobody keeps big sums of money in cash but major unplanned expenses do happen. It is pretty common for a rich person to run out of cash. This phenomenon is known as a 'liquidity gap'. When it happens, a person runs out of cash and other liquid assets that are quick and easy to convert to cash. But they would have their long-term assets like investments in companies, real estate, and some such. The problem with the latter is that if you need to sell them in a hurry, you might have to accept a lower value.

For instance, if you have invested in a real estate investment trust (REIT), you might find that you need to sell it quickly during a market downturn. However, cashing out at this time may not fetch the best possible value. The key is to have a plan for how to manage your assets in different scenarios.

Adaptive Strategies for Wealth Preservation

There are ways to sort out the 'broke' situation at different costs. One such strategy is to engage in smart financial planning. Regularly reviewing and rebalancing your portfolio can help maintain stability. Diversification – spreading your assets across various types of investments – can also mitigate the risks associated with any single asset type.

Another effective method is to build a robust emergency fund. This fund should cover several months of living expenses. This buffer can be a crucial buffer in times of unexpected expenses or market downturns.

In conclusion, being truly 'broke' is not about a lack of wealth but a lack of liquid assets. Rich people may not have all their wealth in cash, but they have a diversified portfolio that can weather economic storms. Understanding the concept of liquidity and how to manage it is key to maintaining financial health even during tough times.