I Work With Millionaires: 5 Money Lessons That Apply at Any Income Level
Reaching millionaire status often requires a combination of strong earnings, savvy investments, smart money management – and luck.
Once you get there, it’s important to stick to the same financial principles that helped you build wealth in the first place. These principles don’t just apply to the wealthy, however.
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Here are five money lessons that many millionaires have taken to heart and that also apply at any income level.
1. Build a Bigger Emergency Fund Than You Think You’ll Need
Maintaining an emergency fund is important no matter how much wealth you’ve amassed. The general rule is that you should have enough to cover at least three to six months’ worth of essential expenses.
But it might be better to aim higher than that, according to Chad Cummings, an attorney and certified public accountant at Cummings & Cummings Law who previously worked in finance and tax.
“My wealthiest clients keep 12 to 18 months of expenses in liquid reserves,” he said.
Your reserves should not include brokerage or money market accounts, either, because these “can become illiquid as soon as a flag is placed on the account,” Cummings added.
If that happens, it can take “weeks or months to resolve, often through opaque internal processes and nebulous bank procedures.”
2. Don’t Cosign or Guarantee Debt
Cummings cited this as “probably the most important rule” for both millionaires and less-wealthy clients.
“I counsel clients to never cosign or guarantee debt, even for a family member,” he said. “One cosigned auto loan can trigger cross-default clauses across all credit facilities. It sounds minor, but this is a landmine for the middle and upper classes alike.”
3. Max Out Tax-Advantaged Accounts
Here’s a money lesson that can go a long way toward building long-term financial security.
“My successful clients – middle class and wealthy alike – always fund tax-advantaged accounts to the statutory maximum before considering taxable investments,” Cummings said. “For example, a 35-year-old who skips a $23,500 annual 401(k) contribution forfeits over $1.2 million in tax-deferred growth by age 65. As a bonus, these are often protected from creditors in lawsuits and bankruptcy. The time to plan for lawsuits and litigation risk is well in advance of any court filing because of so-called fraudulent conveyance laws.”
4. Review Beneficiary Designations Annually
Cummings tells all of his clients to review their beneficiary designations every year to ensure their assets don’t fall into the wrong hands.
“I have seen a $4 million IRA pass to an ex-spouse because the holder updated the will but never changed the beneficiary form,” he said. “The designation overrides the will. This is a major point of misunderstanding.”
5. Own Entities – Not Just Assets
Cummings recommended owning the “entity that owns the asset” rather than merely the asset itself. This applies to everything from real estate to boats and aircraft.
“This is what they don’t teach in MBA school: Direct personal ownership of property exposes every other asset to a single plaintiff’s judgment,” Cummings said. “[This is] avoidable with entity structuring, which doesn’t have to be complicated. Often two or three well-managed LLCs suffice for high-net-worth families and one or two for middle-class families.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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