5 things rich people do with money — that you should be doing
investing is the best way to handle money. the main thing is to invest it correctly
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You can learn a lot from how rich people handle their money.
The very rich — those with investable assets of at least $3 million — have a lot in common when it comes to their financial management, according to a recent survey of nearly 700 high-net-worth investors by U.S. Trust.
Here are five of the things that most rich people do with their money that financial advisers say you should consider doing, too.
1. Delay gratification. More than eight in 10 high-net worth investors say that investing in long-term goals is more important than funding current wants and needs. “If you are going to boil down wealth-building down to one simple thing, I’m hard-pressed to think of a better characterization than the ability to delay gratification,” says Greg McBride, the chief financial analyst for finance site Bankrate.com. “If you are spending first and trying to save what is left over, you will often find that nothing is left over.”
Consider: If you put $100 toward your retirement each month — rather than spend that money — at the end of 20 years, you’d have roughly $40,000, assuming a 5% rate of return. If instead, you had just spent that $100 each month, you would have missed out on more than $15,000 in earnings. Of course, not everyone can heed this advice as “you can’t ignore your current needs” if they need funding, says Joe Duran, CFA, the chief executive of financial firm United Capital and author of “The Money Code.” Just make sure that you understand the difference between needs (basic food, shelter, clothing, etc.) and wants, he adds.
2. Use credit strategically. Roughly two in three high net worth investors say they consider credit a decent way to build wealth, and four in five say they know when and how to use it to their financial advantage, the U.S. Trust study also found.
Of course, this strategy isn’t without its risks — remember, credit can be costly. But some advisers say that savvy individuals can take this advice to heart. McBride says that consumers can do this in a number of ways: Those who pay off their credit card balances in full each month should use a rewards card and earn cash or other perks for spending they’d do anyway. You could also, rather than racing to pay down your mortgage or student loans (assuming these are low-rate, fixed loans), pay them down on schedule and instead use that extra money to shore up your retirement funds, he says; in these cases you are, in a way, using money the bank or the government lent you to fund your retirement. (Of course, you must make the payments required on these loans.)
3. Use a long-term, buy-and-hold strategy. Fully 85% of high-net worth investors say they made their biggest investment gains through long-term buy and hold strategies (in which you buy investments and hold onto them for many years), and they did this using mostly traditional stocks and bonds (89% prefer this approach).
It’s tried and true advice that Warren Buffett himself has espoused. This year, when he was asked by CNBC’s “On The Money” hosts what investors worried about severe market fluctuations should do, he said “I would tell them don’t watch the market closely … the money is made in investments by investing … and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
4. Make tax-conscious investment decisions. More than half of high-net worth investors agree that investment decisions that factor in tax implications are better than pursuing higher returns regardless of the tax implications, the U.S. Trust study concluded. That’s because, as McBride puts it, “what really counts is net pay — how much you are truly netting after taxes.” What’s more, “bad tax management on your investments can lead to having to give up as much as 40% of your gains every year,” says Duran.
Average investors can heed this advice by investing their retirement savings in tax-advantaged plans like a 401(k) or IRA, saving for their child’s college in a 529 plan, or socking money away into a flexible spending account.
5. Invest in tangible assets. Roughly half of high-net worth investors say they have some tangible assets like investment in real estate or farmland that can produce income and grow over time in value. “There are merits to real estate as a diversifier and income source; it’s valuable to a well-rounded portfolio,” says McBride. However, what makes up someone’s asset allocation and what asset classes they use beyond stocks and bonds should really be a customized decision, says Jimmy Lee, CEO of the Wealth Consulting Group in Las Vegas. “For example, if someone already owns a lot of real estate it may not be prudent for an adviser to suggest buying more through them.”
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