According to Federal Reserve data, the average American has a net worth of $1,063,700 as of 2022. But if you look at the median net worth, that number is just $192,900. This suggests that the typical American has a lot less than $1 million in assets. And it's likely a wealthy minority that's driving up that average.
In fact, some people have net worths far greater than these averages. And they have to manage their money in a completely different way. Here are some things the super-rich tend to do that you probably wouldn't:
1. Buy a rental property
Owning a rental property is a great way to generate a steady income and grow your wealth. But buying a rental property requires money. Even if you can get a mortgage, you'll generally need to come up with a down payment. You also need to be in a position to pay the maintenance costs of the rental property.
If you're only making an average wage, you might not be in a position to buy a rental property. However, there are more creative ways to invest in real estate.
For example, you can buy shares in a REIT (real estate investment trust). Many REITs, like many stocks you're familiar with, are publicly traded, which means you can buy and sell them in your brokerage account just like any other tech stock.
REITs are also required to pay out at least 90% of their taxable income as dividends to shareholders each year, making them a great way to build wealth, since the dividends you receive are money you can reinvest.
2. Invest in assets that are not available to the general public
Earlier we mentioned that it's easy to buy and sell shares in a REIT. But that only applies to those that are publicly traded. There are also private REITs and other types of private investment funds available to the very wealthy. But to access them you may need an “entrance”, such as having a financial advisor who can put money into these funds. And there is often a minimum purchase amount. That could be $50,000, $100,000, $250,000, or more, depending on the investment in question.
This type of investment strategy may not be practical for someone with an average income, but you can do pretty well by adding an S&P 500 ETF (exchange-traded fund) to your portfolio.
The index has an average annual return of 10% over the past 50 years, so $10,000 invested in an S&P 500 ETF today could be worth roughly $281,000 in 35 years, assuming the same rate of return.
3. Plan for succession
Wealthy people with large assets tend to pay close attention to estate planning, which often goes beyond just writing a will. They typically work with an attorney to set up a trust to ensure that their assets are passed on efficiently. While a trust may not be right for you or necessary, you don't necessarily have to be super-wealthy to set up a trust. However, it does come with costs that you may not want to incur.
But at the very least, make sure you have a will prepared so you have a say in what happens to your assets.And if you're looking for an efficient way to leave money to your heirs, consider saving for retirement in a Roth IRA.
Roth IRAs aren't subject to required minimum distributions (RMDs) like other retirement plans, which require you to spend your savings while you're alive, and the rules for inherited Roth IRAs are quite favorable for the recipient: Withdrawals from an inherited Roth IRA, for example, are generally tax-free.
The specific money management strategies that the wealthy tend to employ may not be ones you can replicate, but as you can see, there are plenty of great alternatives you can consider, even if you're not wealthy.
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