Being wealthy is a subjective matter and means different things to different people — for example, being able to travel, live comfortably, grow your savings, etc. But generally speaking, not having to worry about money issues and having financial freedom can be a big differentiator.
Wealthy individuals, whether it's through generations of wealth or hard work, favor certain financial strategies that not only tend to preserve their wealth but also make their bank account balances grow even more.
Here are six profitable strategies for the wealthy.
Diversification
Taylor Kober, CFP, founder and CEO of 11 Financial, noted that wealthy individuals often adopt strategic investment strategies such as diversification, asset allocation and long-term investing because they understand the importance of spreading their investments across different asset classes to manage risk while seeking higher returns over the long term.
“For example, by investing in a combination of stocks, bonds, real estate and alternative assets, you can build wealth steadily over many years,” Kovar said.
Leveraging Debt
Another favorite strategy of the wealthy is using debt to their advantage.
“Rather than avoiding debt altogether, the wealthy use it strategically to grow their wealth,” Kovar said.
For example, you can take advantage of low-interest loans to invest in income-generating assets such as real estate or business ventures, capitalizing on the possibility of earning a higher return than the cost of borrowing.
“By using debt responsibly and focusing on investments that have the potential to appreciate in value, they can grow their wealth over time,” Kovar added.
Long-term investment
Another sign of abundance is a penchant for long-term investments.
Erika Kullberg, personal finance expert and founder of Erika.com, points to investment guru Warren Buffett as an example of this: He holds onto his investments for the long term, taking advantage of the compound growth of earnings and dividends.
“This approach is preferred because it allows the market to weather sharp fluctuations better in the long term, while also ultimately generating sufficient cash generation,” she said.
Philanthropy and Giving Strategies
There are a few methods commonly employed by wealthy individuals, such as Emily Irwin, head of advisory relations at Wells Fargo, who explains that you can gift $18,000 a year to as many relatives as you like.
“Not only is this a conservative strategy, but it also allows the flexibility to give the full amount one year and nothing the next, if necessary,” she said. “And loans to family members up to $18,000 each do not have to be reported as taxable income by either the donor or the recipient.”
Another example is intrafamily loans at favorable tax rates, a tactic that essentially allows them to act as a “bank” to family members, she explained.
As Kullberg noted, philanthropy is another strategy that goes beyond giving back to society and can bring financial benefits, such as tax deductions.
“Foundations established by individuals like Bill Gates and Melinda French Gates demonstrate that charitable giving can also serve as an effective tax planning tool,” she said.
Multiple sources of income
Rather than relying on a single source, wealthy people often focus on creating diverse income streams. Multiple income streams can come from investments, rental properties, side hustles, and even royalties, says Dane Habig, controller at Utopia Management.
“For example, Robert Kiyosaki, author of Rich Dad Poor Dad, emphasizes the importance of this approach heavily in his book,” says Habig.
Estate Planning
Proper estate planning is a key component in building generational wealth and leaving a legacy, and is another key strategy used by wealthy individuals.
“They often work with legal professionals to minimize tax liability and ensure their assets are properly managed and distributed after they pass away,” Habig said.
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