Some are born rich, some inherit it, and some work their butt off to acquire it. How the rich use and spend their riches may also contribute to their continuing to be rich. Wow, that sounds kind of confusing :-/ But don’t worry, I’ll straighten it out. And in the process, we’ll come to realize that rich people are not a whole lot different than us. They save regular, they invest, a lot of them live below their means and have an overall simple lifestyle.
How They Save & Invest
The rich know the importance of saving. They know in order to do save meaningfully they must live below their means (which is still living large anyway for them).
Per Investopedia, “while it might not be common to think of the ultra-wealthy as savers, UHNWIs know that living below their means from day one will allow them to achieve their desired level of wealth in a shorter amount of time.” The article also talks about how they invest which is similar to probably many of us: diversifying in a class of assets and intangibles, rebalancing quite often it appears, and looking at the broader emerging markets apart from the US and Europe.
It’s easy to limit our investments in products or services we know or are familiar with using. But the risk is that we may not be diversified enough or over-saturated in one particular sector. For a while, I was over-saturated in technology stocks such as Intel – INTC. At one point I thought, if I could put a lot in this one stock, it could increase my chances of a big FAT return, and was ignoring the risk of not diversifying. Fortunately, my conscious came to my rescue before I suffered losses and was able to slowly reduce my position and instead buy into ETFs.
Another strategy rich people employ as illustrated by Market Watch is using taxes to their advantage. The rich want to pay as little tax as possible on their income. Actually, all of us do, right 🙂
But the rich have more to pay, so they’ll do things like invest in municipal bonds which don’t require the interest earned to be subject to federal taxes. And another strategy is to try and reduce their income as much as possible because lower income can mean lower payment of taxes. In order to achieve this, the rich will incorporate their business. In doing so, they will pay themselves a reasonable salary and take the rest of the payments as dividends which is taxed at a lower rate.
How They Spend
So here are some examples of real live rich people and their surprising spending, or lack of spending habits in these cases:
- Kawhi Leonard of the San Antonio Spurs still drives his 1997 Chevy Tahoe which is paid off
- Chris Rock still drives his old Nissan Altima
- Warren Buffett still lives in the same house in Nebraska he originally bought for ~$31,000
- Mexican billionaire Carlos Slim still lives in the same home for the past 40 years and doesn’t even own a private plane
- Mark Zuckerberg wears basic clothing pretty much every day (t-shirt and jeans – probably not the $300 pair ones either)
- Ryan Broyles who played for the Detroit Lions budgets himself $5,000 per month and uses the Personal Finance Mint software!
So really there are many rich people who live like average Joe’s. Or I suppose they practice stealth wealth.
It’s good for a couple of reasons: (1) lower the risk of getting robbed, (2) lower the risk of long-lost relatives and friends to come knocking at your door for a short-term unsecured loan J, (4) you can have regular friends who don’t know you’re rich and thus you won’t have the pressure of keeping up with the Joneses because you don’t know any of them anyway, and (3) random organizations which you may have nothing to do with and don’t support soliciting and asking for donations.
Famous People That Went Bankrupt
As crazy as it sounds, some famous people out there weren’t able to stay rich for various reasons. So that we don’t make the same mistakes, here are a few examples:
MC Hammer – in 1990, his income was $33 million. A few years later, he only had $1 million and over $10 million in debt. He said it was because he employed hundreds in his community and apparently wasn’t able to pay them. Lesson learned: it’s great to help others, but don’t bite off more than you can chew. On a positive note, he has bounced back and is now investing in start-up apps.
Larry King – before his big show on CNN, Larry King was arrested in 1972 for grand larceny and stealing. As a result, he struggled to find a job and had to file for bankruptcy with over $352,000 in debt. He lucked out with CNN and is worth over $150 million now. Lesson learned: a mistake in the past can cost years of credit detriment and joblessness.
Mike Tyson – earned $400 million in his boxing career. However, he filed for bankruptcy in 2003 as his debts included a divorce settlement of $9 million, $13.4 million owed to the IRS and $4 million owed to the British tax folks. Lesson learned: consider a prenuptial agreement if you think your marriage may not last J, and don’t mess around with tax authorities – foreign or domestic.
Source: Business Insider
So is there anything you’ve learned from the rich in famous in terms of what to do OR what not to do? Does their lifestyle surprise you?
I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!