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These strategies make it easier to build wealth.
It might seem like the rich know something about money that the rest of us don’t. After all, the richest 1 percent of people now hold almost half of the world’s wealth, according to the Credit Suisse Global Wealth Report.
Maybe the rich do have secrets to accumulating wealth — but that doesn’t mean what they know has to remain a mystery. Use these strategies 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.”
“They 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.”
According to Kay, the wealthy only seem to spend money on things that 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.
“Are you really spending in accordance with what you value?” asked Kay. “Do the beliefs and realities jive?”
Don’t Waste Money to Impress Others
Most rich people don’t spend their time and money trying to impress others. “They are not in a race,” Kay said. “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 said. Living below their means and rejecting big-spending lifestyles are key secrets of the country’s richest people, according to the best-selling book, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.”
Spending money to appear rich before you actually are is a surefire way to sabotage your wealth-building goals. So, forget about the Joneses and focus on what matters: accumulating your wealth in the coming years. If you’re determined to appear rich but don’t want to spend money.
Have Plenty of Liquidity
The rich make sure they have sufficient liquidity, or cash, to cover their short-term needs. They have 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 rainy days 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 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, you should 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 that many people 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,” he said.
Even small fees can have a big impact. If you invest $100,000 over 20 years and pay a 1 percent annual fee, your portfolio value will be about $30,000 less than if you had paid a 0.25 percent 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’s Office of Investor Education and Advocacy recommends asking whether the costs can be reduced. You also should shop around for accounts and investment firms with low fees. Then, you’ll be able to keep more of the money you worked hard to save.
Asset Location Is as Important as 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. 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 an up-front tax benefit 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. But when you withdraw that money in retirement, it will be taxed at your regular income tax rate — which is currently as high as 39.6 percent 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 those investments for more than a year, they’ll be taxed at the long-term capital gains rate, which ranges from 0 percent to 20 percent but tops out at 15 percent 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.
