3 Billionaire Secrets to Building and Retaining Wealth

By Markets Fool.com


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According to the U.S. Census Bureau's world population clock, there are currently more than 7.3 billion people on the planet. Among those more than 7.3 billion people sit just 1,810 billionaires with a combined net worth of $6.5 trillion, according to Forbes' most recent rankings of the richest people in the world. Your chances of becoming a billionaire, based on this data, are only about 0.00002%.

Despite being such a small portion of the global population, billionaires are some of the most closely monitored people in the world. They've achieved a few lifetimes' worth of success, and some in a very short amount of time -- and the average Joe or Jane would love the opportunity to share in the success they've had by following their example.

Here's how billionaires build and retain wealth

Unfortunately for middle-class America, there is no concrete formula to becoming a billionaire. What we do have are a handful of billionaire secrets that the rich have used to build and retain their wealth over time that, when implemented, can make a substantial impact on your own personal finances over the long-term.

Here are three of the most important billionaire secrets to building and retaining wealth.

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Berkshire Hathaway CEO, Warren Buffett. Image source: Fortune Live Media via Flickr.

1. Minimize your tax liability

According to Forbes' billionaire list, self-made billionaire Warren Buffett, who runs conglomerate Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), is the third-richest person in the world as of 2016. Yet, based on an op-ed article written by the Oracle of Omaha in The New York Times in 2011, Buffett claims to have paid only a 17.4% effective tax rate, which was actually much lower than that of many of the people he worked with in his office, including his secretary. How does Buffett get away with paying such a low tax rate despite being worth so much? The answer can be found in his investment timeframe.

You may have run across a popular Buffett quote stating that his "favorite holding period is forever." Buffett has made it clear that when he buys stock in a business, he intends to hold it for years or decades to come. Doing so provides a substantial advantage come tax time.

Short-term investments, which are defined as assets sold within 365 or fewer days, get taxed at a rate commensurate with your ordinary income tax bracket. Ordinary income tax brackets in the U.S. are progressive, meaning the richest Americans with short-term capital gains would owe 39.6%. Ouch!

Comparatively, long-term capital gains, or assets held for at least 366 days, get taxed at a much lower rate. Instead of paying 39.6%, the highest-income individuals owe just 20% on long-term capital gains. That's a massive difference that can allow wealthy people to keep a big portion of their gains to reinvest for the future.

Buffett, for his part, also pays a low tax rate because he tends not to sell much of what he owns. There's been no big picture change in the investment thesis for Coca-Colaor Wells Fargo, two core Berkshire Hathaway holdings for more than 25 years. As such, Buffett and his company reap the rewards of slow and steady growth without having any tax liability on the investment gains.

Two smart ways you can minimize your own taxes are to 1) hold your investments for the long-term to take advantage of lower long-term capital gains tax rates, and 2) seek out tax-advantaged retirement tools that can give you an edge. A Roth IRA, for example, allows your investment gains to grow tax-free for the life of the account as long as you don't make any unqualified withdrawals. You're probably not going to become a billionaire by investing in a Roth IRA, but you could very well save four-, five-, or six-digits in taxes that you won't have to pay come retirement.


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2. Live within your means

One of the more interesting traits of some billionaires is that they tend to live well below their means. Just because they have more money than they'll probably ever need doesn't mean they're in a rush to see how much of it they can spend.

Two perfect cases in point are Warren Buffett and the fourth-richest person on Forbes' list, Mexican telecom mogul Carlos Slim. Combined, the two have a net worth in excess of $110 billion -- yet Buffett lives in the same house that he purchased in 1958 for $31,500, while Slim has lived in the same house in Mexico City for more than four decades. These two could buy their own islands and not even blink, but they understand the value of a dollar and prudent budgeting, which is what keeps them from foolishly burning through their fortunes.

The billionaire secret here is pretty straightforward: live within your means.

Amazingly, though, this can be a problem for many Americans. The U.S. personal savings rate is an appallingly low 5.3% as of June 2016, which means far too many Americans are adjusting their spending habits to align with their income rather than finding ways to creatively save money and invest for the future. In other words, too many people are putting current pleasure ahead of future comfort, which is not how Warren Buffett or Carlos Slim operates.

A 2013 poll from Gallup found that only around a third of U.S. households keep detailed monthly budgets. If you don't keep a budget, it can be impossible to understand your cash flow; and if you don't understand your cash flow, you won't be able to optimize your ability to save, or to gauge how well or poorly you're doing with regard to meeting your retirement goal. Formulating a budget is easier than ever with online tools at the ready. The real challenge these days is staying accountable to your plan and surrounding yourself with people that have like-minded goals of saving and retiring comfortably.


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3. Follow the beat of your own drum

Finally, billionaires have demonstrated that they're leaders. In nearly all instances they became industry leaders or investment moguls by following the beat of their own drum rather than following in the footsteps of someone else.

Instead of trying to identify the drugmaker with the next breakthrough cancer drug, or which fiber-optics provider would have the next game-changing product, Warren Buffett went against the tide by purchasing some of the most tried-and-true, and borderline boring, companies on the planet. Over time, with the help of dividend reinvestment and compounding, he's turned his investments into a fortune.

Carlos Slim beat his own drum in much the same way when he took the risk of purchasing the Mexico telephone monopoly from the government in the 1990s. The move allowed Slim's fortune to explode higher, with Telmex still in control of around 70% of all fixed and mobile lines in Mexico as of today. Slim's willingness to take risks and head into areas where other investors have avoided has been his key to success.

The key point here is that you have to be willing to take risks if you want the possibility of a reward. One of the best ways to do this is by choosing to invest in the stock market.

A Bankrate Money Pulse survey last year found that 52% of Americans don't have any money in the stock market, which is sort of maddening given that stocks, over the long run, outperform practically all other asset classes. Historically, the stock market tends to increase in value by 7% per year, including dividend reinvestment, which would allow you the opportunity to build real wealth over time. If you're among these aforementioned 52% of Americans with $0 in stocks, perhaps now is the time to start marching to the beat of your own drum by investing in stocks.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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