10 Secrets All Wealthy People Know
If it seems like the rich know something about money that the rest of us don’t, it’s probably because they do. There must be some reason the richest 1% of people now hold more than 30% of the world’s wealth, according to the Federal Reserve.
Maybe the rich have certain secrets to accumulating wealth — but that doesn’t mean what they know has to remain a mystery. Learn about strategies that you can use so you can build your own wealth, too.
Spending Must Align With Goals
One of the keys to being rich is having goals, said Michael Kay, president of Financial Life Focus and author of “The Feel Rich Project.”
“(The rich) know what they care about,” he said. “Maybe it’s passing wealth to another generation, maybe it’s attaining a particular lifestyle. They are mindful of not wasting resources on things that have no value.”
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According to Kay, the wealthy tend to spend money only on things they care about. The rest of us can learn from this by setting our own goals and then monitoring our spending to see if it aligns with those goals.
Don’t Waste Money To Impress Others
Most rich people don’t spend their time and money trying to impress others, Kay said.
“They are not in a race. They know they have made it, so their attention is not on what others think.”
In fact, many wealthy individuals wouldn’t have become rich if they had spent their hard-earned money buying things to keep up with others, he added.
Authors Thomas Stanley and William Danko said much the same thing in their 1996 best-seller, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy,” writing that a couple of key secrets of the country’s richest people are living below their means and rejecting big-spending lifestyles.
Spending money to appear rich before you actually are rich is a surefire way to sabotage your wealth-building goals. So, forget about the Joneses and focus on what matters: accumulating wealth in the coming years.
Have Plenty of Liquidity
The rich make sure they have sufficient liquidity, or cash, to cover their short-term needs. They maintain an emergency fund so “they don’t have to disrupt their life for an unexpected occurrence,” Kay said.
The fact that rich people have money set aside for a rainy day isn’t solely a function of their wealth. They have cash reserves because they are disciplined enough to save.Everyone should aim to build an emergency fund with enough cash to cover six to nine months’ worth of expenses, Kay said.
However, you don’t have to set that much aside all at once. You just need to be working toward that goal with every paycheck. With that in mind, arrange to have a set amount automatically transferred from your checking account to savings each month.
“Like anything else, it’s a goal,” Kay said. “It only makes you a failure if you’re not working on it.”
Avoid Fees at All Costs
Fees can easily eat away at your wealth. Whether it’s a late fee on a credit payment, a foreign transaction fee from using a debit card abroad or an overdraft fee on your checking account, it’s important to avoid incurring unnecessary fees.
“Wealthy people understand every fee they pay means less money in their pockets,” said Taylor Schulte, CEO of Define Financial in San Diego.
Know What You’re Paying in Investment Fees
The rich also pay attention to investment fees — something many others overlook. For example, more than half of workers don’t know they’re paying fees on their workplace retirement savings accounts, according to a study by the National Association of Retirement Plan Participants.
Yet those fees can eat away at your returns, Schulte said. “The more you’re paying in mutual fund fees or transaction fees means less money in your pocket.”
Even small fees can have a big impact. If you invest $100,000 over 20 years and pay a 1% annual fee, your portfolio value will be about $30,000 less than if you had paid a 0.25% annual fee, according to the Securities and Exchange Commission’s Office of Investor Education and Advocacy.
Check your account statement to see what fees you’re paying. If they seem high, the SEC recommends asking whether the costs can be reduced. You also should shop around for accounts and investment firms with low fees, which can help you keep more of the money you worked hard to save.
Spread Out Asset Allocation
If you’ve read anything about investing and saving for retirement, you’ve likely encountered advice about asset allocation. That means having the right mix of investments, rather than putting all of your money in just one asset. However, the rich know that asset location is just as important as asset allocation, Schulte said.
In other words, the rich don’t keep all of their assets in one type of account, such as a tax-deferred retirement savings account. Instead, they spread it around. Wealthy people also have investments in brokerage accounts to limit the impact of taxes in retirement, Schulte said.
Choose the Right Retirement Savings Account
You can earn tax benefits by contributing to a 401k or similar plan because contributions come out of your paycheck before taxes — lowering your taxable income — and the money grows tax-deferred. When you withdraw that money in retirement, however, it will be taxed at your regular income tax rate, which is currently as high as 37% for the wealthiest taxpayers.
You don’t get any tax breaks by investing in stocks, bonds or mutual funds through a brokerage account. But if you hold these investments for more than a year, they’ll be taxed at the long-term capital gains rate, which ranges from 0% to 20% but tops out at 15% for most taxpayers.
The types of investments you have in your accounts can have a dramatic effect on your long-term returns, Schulte said. Typically, it’s best to keep securities such as bonds, mutual funds and dividend-paying stocks in tax-deferred retirement savings accounts. Then, keep your individual stocks in brokerage accounts.
Plan Taxes All Year
The rich don’t wait until April to start thinking about their tax returns, Kay said. They take steps throughout the year to lessen the impact of taxes. With the help of tax professionals, the wealthy also avoid making costly tax mistakes.
If you have the resources, check in regularly with a financial or tax adviser throughout the year. Stay up-to-date on the latest news that can affect your taxes, and keep records or receipts that could help you qualify for various tax deductions.
Donate to Charitable Causes
Wealthy individuals know that donating to charity doesn’t only help the world at large — it also helps their finances. If you itemize your tax return rather than take the standard deduction, you can deduct charitable contributions to qualified organizations. The more you deduct, the more you reduce your taxable income.
“Charitable giving is an excellent tool to mitigate tax consequences,” Schulte said. “The wealthy know this, and you don’t have to be wealthy to do it.”
Whether you write a check to your favorite charity or donate clothes you no longer wear to Goodwill, hang on to your receipts and claim your charitable deduction.
Or, be more strategic with your giving by setting up a donor-advised fund, Schulte said. These simple, low-cost funds are available through investment firms and let you get a tax deduction at the time you set aside money in the account. You can then make grants by following your own time schedule.
Hire Advisors
Wealthy people surround themselves with knowledgeable tax, legal and financial professionals. To increase your odds of accumulating wealth, don’t assume you need to be rich to hire an advisor. On the contrary, investing in a support system now can help you achieve the wealth you desire down the line.
“If you keep using money as the reason you can’t get on the right track, you will keep making the same mistakes,” Kay said. “[The wealthy] don’t try to do it all themselves.”
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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