6 Reasons the Rich Stay Rich
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If you're trying to make more money, studying therichis a great place to start. Some wealthy people were born into money, while others worked their way to the top. However they got there, many have figured out how to stay rich.
Learning how to make millions is one thing, but mastering the art of keeping that fortune intact is a different task. Many people getrich, only to blow through their earnings in a matter of years.
Whether you have come into money or are still figuring out how to get rich, keep reading to learn more about how the rich stay rich.
1. They avoid get-rich-quick schemes
One common misconception is that the wealthy constantly look to get richer more quickly through engagingin activities such as picking stocks, said Laurie Samay, a New York-based certified financial planner and client service and portfolio manager at Palisades Hudson Financial Group. "In reality, the wealthy are typically more interested in preserving their wealth," she said.
Rather than taking a risk on volatile get-rich-quick schemes, Samay said the wealthy take a slow-and-steady approach to investing, and they focus on diversification. She recommended investing across several asset classes to gradually build wealth.
"Many academic studies have concluded that the mix of stocks and bonds in a portfolio has the greatest influence on performance -- even more so than transaction costs and security selection," Samay said. "Like the rich, your portfolio should be adequately diversified across asset classes."
Samay said being diversified might include exposure to:
- Different types of bonds
- Large-cap equities
- Small-cap equities
- International equities
You can further diversify by investing in specialty asset classes, such as natural resources and real estate equities, Samay said.
2. They make retirement savings a priority
Among the wealthy, saving for retirement is typically a priority because they want to maintain their current lifestyle -- at least to a certain extent -- during their golden years, Samay said. "This principle is just as important for the average Jane or Joe," she said. "Although it's tempting to focus on improving your current financial situation, it's never wise to ignore your future finances."
Retirementmight be decades in your future, but Samay said your best chance of having a financially secure and comfortable retirement is to start putting money aside today. She recommended taking advantage of any employer-sponsored retirement plans available to you.
"In a 401(k) arrangement, your employer will typically match all or a portion of the contributions you make to the plan, giving you more bang for your buck," Samay said. If your employer doesn't offer a retirement plan or you would like to make additional investments, consider contributing to an individual retirement account or a Roth IRA.
"Although you might not be able to max out your contributions today, the sooner you start, the less you'll have to save in the long run, due to market gains and compounding," Samay said.
3. They keep taxes in mind
The wealthy are subject to the highest tax brackets, so they often go out of their way to reduce their tax bill wherever and whenever possible, Samay said. "One of the ways they accomplish this objective in their investment portfolio is through asset location, or the distribution of investments across taxable, tax-deferred, and tax-free accounts," she said.
You might not have millions of dollars to work with, but you still can plan your investments to keep taxes to a minimum. Savvy investing keeps more hard-earned money in your pocket.
Samay recommended holding income-producing securities in tax-deferred and/or tax-free accounts, where taxation on the income can be deferred or avoided entirely. Growth investments that pay little to no dividends and tax-efficient fixed-income securities should be held in taxable accounts, she said.
"If your portfolio is largely invested in mutual funds, asset location is especially important," Samay said. "Mutual funds are required to distribute 90% of taxable income earned each fiscal year. If held in taxable accounts, these distributions become taxable."
Creating a well-balanced portfolio takes time and effort, but it can really pay off. Learn the differences among various investment vehicles and the benefits of storing money wisely. For example, some mutual funds -- such as index funds -- have little portfolio turnover and distribute only a small amount of capital gains annually. They can be held in taxable accounts, Samay said.
By contrast, she suggested holding actively managed mutual funds -- which have much greater portfolio turnover, and thus larger gains to distribute -- in tax-deferred and/or tax-free accounts. "This should help you invest in a more tax-efficient manner," she said.
4. They build multiple sources of income
You already know living paycheck to paycheck isn't the way to get rich, but simply relying on one streamof income also won't cut it. If you unexpectedly lose your job, it might take only a few months to burn through emergency savings. The rich are well aware of this fact and take steps to protect themselves.
"When you are not dependent on one source of income, you will not be as devastated when something bad happens," said Adam Torres, a Los Angeles-based certified financial planner and CEO of both Century City Wealth Management and media company Mr. Century City. "Yes, bad things happen to rich people also. But having money come in while they are weathering the storm helps."
Mimic the rich by searching for additional streams of income. From starting a side business to investing in dividend-paying stocks, there are plenty of ways to bring in money through additional channels.
5. They leverage debt to their advantage
On the surface, being 100% debt-free seems like an obvious way to get rich. But it's not always that simple. The wealthy understand the difference between the kind of debt that weighs you down and the type that builds a fortune.
For example, the rich focus on using leverage by getting things such as mortgages, Torres said. A mortgage allows you to own a property that you hope will grow in value. "This is done with only putting a small amount of money down for your down payment," Torres said. "Using leverage to obtain assets like homes and other investments gives the rich a better chance at staying rich."
For example, purchasing a home in an up-and-coming neighborhood for a nominal price increases your monthly expenses in the short term. However, a few years down the road, you should be able to sell thehome for a large return, which will seriously pad your bank account.
6. They create robust financial plans
Rich people know the importance of hiring the right financial pros. "The rich hire financial advisors and CPAs. They understand that the cost of hiring and working with professionals far outweighs the cost of ignorance," Torres said. "It takes a team to build wealth. But more importantly, it takes a team to grow and preserve it."
If you don't have a lot of cash in the bank, you probably think hiring a financial advisor or CPA is a waste of funds. But these professionals can help you map out a plan to make more money, allowing you to create a comfortable future for your family.
Most fee-only managers charge approximately 1% to 2% of the funds they're managing, according to a CNN Money report. You also might be able to find one who will charge by the hour, which typically ranges from $100 to $400. Even if you can only afford to meet with a financial expert on a quarterly or annual basis at first, it can be money well spent.
This article originally appeared at GoBankingRates.
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