The 1% continues to receive flak across the globe, as income disparity is one of the hottest financial topics worldwide. Whether or not you think that criticism is deserved, there’s one thing that can’t be denied: the super-rich know how to grow their wealth.
As a regular investor trying to cobble together enough for a comfortable retirement, what can you learn from the wealthiest investors? Read on to find out.
9 Top Tips on How the Rich Grow Their Money
They save more than average. Instead of spending more, the wealthy tend to save most of their money. According to researchers from UC Berkeley, those in the top 1% save almost 40% of their salary while those in the top 1% to 10% save 12% of their salary. A general recommendation is that you should save between 10% and 15% of your income to maintain your current lifestyle in retirement.
They live frugally. Many millionaires drive around in used cars and spend money carefully. Warren Buffett famously lives in the same house he bought more than 50 years ago. Instead of upgrading your car or house every time you get a raise, keep your living standards modest.
“I have met many people in my career who live far below their means. Whether you are wealthy or not, if you live below your means, you will be able to save up a sizable amount in order to have the retirement you want,” says Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, Lexington, Mass.
- They diversify their portfolio. While many CEOs own stock in their own companies, the rich also tend to keep a mix of funds. Proper allocation allows you to better withstand the ups and downs of the market. A mix of growth and income securities is usually recommended.
“As Nobel Laureate economist Merton Miller always liked to say, ‘diversification is your buddy.’ When done right, you can decrease the overall risk of your portfolio without sacrificing expected return. Almost all investors should buy, hold and rebalance a globally diversified portfolio of index funds that properly matches their capacity to take risk,” says Mark Hebner, founder and president, Index Fund Advisors, Inc., Irvine, Calif.
They have several sources of income. Don’t rely solely on your day job for income. Wealthy folks often have different ways of earning money, whether it’s from rental properties or side businesses. Earning more money allows you to sock more away in your nest egg.
They hold stocks for a long time. The ultra-rich understand that investing in the stock market is a long-term strategy instead of a short-term solution. They also keep their cool when the market dips.
“Stocks are too volatile to be held only for the short term. Events like 2007 and 2008, where many investors saw their wealth cut in half over the course of 12 months, speaks to the volatility of stocks,” says Hebner. “But if you hold stocks over many years and decades, history has shown that these investors have been rewarded with a return close to 10% per year.”
They make saving automatic. The rich like to take the set-it-and-forget-it approach to investing. They create automatic transfers to their retirement accounts so they don’t have to remember to put money away in their 401(k) plans.
They start early. Time is the most important factor when it comes to growing a significant retirement portfolio. The rich know that they need to start saving as soon as possible to build wealth. “Starting to save early in life accomplishes two things. First, it creates a discipline that will carry you through your life with good saving habits. Second, compound interest (or gains) allows you to grow your money over time with a greater impact than if you started later in life,” says Chisholm.
They max out their retirement accounts. If you’re younger than age 50, you can contribute up to $23,500 a year in your IRA and 401(k) combined. The top 1% know they need to take advantage of these limits.
They don’t carry debt. Since the rich live frugally, they also pay off their debt. That means buying cars in cash, paying off a mortgage early and not carrying credit card debt. In general, they don’t make a habit of relying on credit for personal expenses