Were they all born into money and given trust funds as early adults?
Or is there something more systematic about how they got there?
Believe it or not, it has been said that 80-86% of all millionaires in the U.S. are self-made. The same figures apply to decamillionaires (those with a net worth of $10 million or more) as well.
So then, what is it? What are the secrets to money that they seem to know and the rest of us don’t?
In this post, we’re going to take a look at some of the strategies that the Rich and Wealthy use every day to advance their position.
In many cases, I think you’ll see that becoming rich is all a matter of tipping the financial equation in your direction. The more money you have coming in than is going out, the better your situation becomes.
But how does someone actually do this?
Secret #1 – Don’t Work for Your Money. Put Your Money to Work for You.
In fact, when done right, your money could one day create more money than you earn from working. Thus, it becomes irrelevant if you continue going to your job or not anymore. (When you reach this point, you’ve achieved financial freedom!)
But what do we mean by this?
Imagine for a minute that you require $60,000 per year for you and your family to live.
How will you earn this money?
Option 1 – You to Work
On one hand, you could do what millions of us do every day and simply go to work.
Every two weeks, you’ll get paid. And every two weeks, you’ll likely spend this money on what you need to survive. Hence, as they say, you’ll live “check to check”.
This kind of arrangement can be maintained for years. But it carries a lot of risks.
Eventually you’ll get older and tired, and you won’t want to work anymore.
Or, it more extreme circumstances, you might lose your job. Now your only source of income has been unfortunately cut off.
Option 2 – Put Your Money to Work
Now here’s how the Rich would generate this income:
Let’s say you find a solid investment that pays you 4% interest ever year.
How does this help us?
Instead of working for $60,000, we have the possibility of using this investment to generate this income for us.
Of course, the amount of money we’d need is $60,000 / 0.04 = $1,500,000.
Understandably, that’s no small sum of money! But no one said we have to find overnight either.
Many people take 30 years or so to save up a fortune this size. But they do it with the motivation of knowing that their stash will one day have the power to do exactly this: Generate income so that they don’t physically have to.
(By the way, this example is a very real one. It’s very common for people who have achieved financial freedom to live comfortably off of 3-4% of their income for the rest of their lives.)
Of course, there’s no reason you need 30 years to put this system to work. You can make it happen as quickly as you want.
All you have to do is build up a sizeable nest egg (in our example, $1.5 million dollars).
So how do we do that?
First and foremost, by leveraging the power of compounding returns.
Secret #2 – The Power of Compounding Returns
In our last example, you might have thought to yourself:
“$1.5 million dollars? (… sarcasm …) Great. If I save $10,000 per year, I’m only going to need to work for another 150 years before I’m ready to retire. Nice advice.”
… Of course, that’s not how it works.
The Rich don’t work 150 years to become rich. They don’t even work 50 years.
So what’s their secret?
They build their wealth over time using the power of compounding returns.
The Difference with Compounding Returns
Let’s go back to that scenario where you’re going to save $10,000 per year.
Over the next 30 years, you could do one of the two options:
- Put your money in a regular bank account earning no interest.
- Invest the money in a stock market index fund earning an average 7% return each year.
Fast-forward 30 years. What would be the results?
- You’d have $300,000 in the bank account.
- Your investments would have potentially grown to $944,608 in the investment account.
Wait? How is that possible?
How did the second option result in over 3 times MORE money?
That’s the beauty in leveraging compounding returns to your advantage.
When we first invest, money grows on top of our initial contribution. This is called a “gain”.
Then in year two, something incredible happens. Money grows on top of both our contribution as well as the gains.
At first, your gains increase slowly as you contribute more and more money.
But if you keep this process up for years and years, it won’t be long until you’re actually earning more money from the gains than you are from your initial contributions.
How to Maximize Compounding Returns
NOW: For the even BIGGER secret behind this whole process:
The earlier you start saving, the BIGGER the rewards potential is in later years to come.
To illustrate how incredibly effective this can be, I wrote an article that describes a simple strategy for how to turn your teenager into a millionaire. Starting at age 16, contribute $5,500 to your retirement savings each year for the next 3 years. By the time you’re age 60, those three simple contributions could be worth almost $1 million dollars!
Okay … maybe you missed your chance to start at age 16. But you certainly could start today!
Seriously. The more you delay, the more reward you miss out on. Therefore, the best thing you can start doing for yourself is to start saving and investing right away.
So what’s a great way to find more money that you can use to invest and compound over time?
My favorite technique: Paying less in taxes, and keeping that money for myself instead.
Secret #3 – Pay As Little Taxes as You Legally Can
It was Benjamin Franklin who famously said “In this world nothing can be said to be certain, except death and taxes”.
But is this always true?
Believe it or not, according to our own IRS, the answer is often “no”.
The U.S. government gives us plenty of legal opportunities to pay less taxes on our earnings. And it’s in knowing these tax-breaks that the Rich are able to save more money than the rest of us.
If you don’t think so, then check out this article from Bloomberg. It illustrates how two people who report the same amount of income to the IRS can end up paying substantially different tax rates.
And this story isn’t unique. The tax-code is completely lopsided in favor of the methods that the Rich use to make their money (long-term investments, businesses, property, etc.). (By the way, it should also come as no coincidence that these are also the people who create these laws.)
Legal Ways to Pay Less Taxes
So is the system rigged?
In some ways, yes. But keep in mind: You don’t necessarily have to be some big hedge fund investor or businessman to take advantage of many of the tax breaks that the IRS offers. Most of them are simple and accessible enough that regular people like you and I can use them.
The first step, of course, is in knowing that they even exist!
Here’s a short list of the most popular tax breaks offered by the IRS:
- 401(k)’s. The most common type of tax-advantaged retirement plan offered by employers. 403(b)’s and 457(b) plans are similar. Learn more about 401(k)’s and 403(b)’s.
- IRA’s. Another common type of tax-advantaged retirement plan setup by individuals. Learn more about IRA’s.
- Capital gains / dividends. Investments that nearly anyone can purchase.
- FSA / HSA’s. Accounts that give you a tax-break on your medical and dependent care expenses. Learn more about HSA’s and FSA’s.
- 529’s. Tax-sheltered account you can use to save for your children’s college. Learn more about 529 plans.
- SEP IRA. Another type of retirement account you can setup for yourself if you earn money on the side. Learn more about SEP IRA’s.
How can these benefit you?
Let’s take the 401(k) for example.
Whenever people ask me how much they should save in their 401(k) plans, my answer is always to save all the way up to the IRS maximum limit. Why? Because you’ll end up effectively be putting $4,070 in your pocket as opposed to sending it off to the IRS. More on how that works here.
But it doesn’t have to stop there.
You could also contribute to an IRA, 529 plan, and use an FSA to reap even more tax-savings. The possibilities are endless!
Of course, in order to actually use them to their full potential, you’re going to need as much money as possible to use for saving. So where is that money going to come from?
Secret #4 – Get As Much As You Can for As Little As Possible
In fact, they often are very selective about what they buy and why they buy it.
One place where you can find lots of amazing examples is in the book “Stop Acting Rich: …And Start Living Like a Real Millionaire” by the late Dr. Thomas Stanley (also author of “The Millionaire Next Door”).
Think all millionaires drink expensive wine, wear luxury watches, and drive high-end vehicles?
Not at all.
Most of these things are bought by people he calls the “aspirationals”. They are the ones who buy the things they “think” millionaires buy. But sadly, they’re just copying what advertising and media has sold them.
In reality, Dr. Stanley discovered that REAL millionaires (people with actual net worth’s over $1 million) spend their money quite differently … and conservatively.
Most of them live in “normal” homes, drive modest cars, drink $10 bottles of wine, wear watches that cost less than $100, and so on.
(Go figure … this kind of frugality is probably why they’re millionaires …)
The takeaway: Don’t believe all the B.S. you see on TV and the Internet. The Rich value getting quality at a great price over simply buying something because of its luxury brand name. They’ve adopted a “get more for less” way of thinking. And its something that every single one of us can benefit more from if we’re willing to work for it.
In my own personal experience, I’ve seen it work over and over again.
No matter if it’s a new appliance for the house, a room we need painted, a new vehicle purchase, …. My goal is always to get the best price possible.
This has inspired me to do things like learn about the world of travel hacking. In one short year, I was able to get over $4,000 of travel expenses for free. Not too bad!
Keep in mind that getting more for less can also apply to your investments too.
For example, in this article from Time, they compared the difference in investments with a 1% fee versus a 0.25% fee.
Over a 30-year period, the couple with the 1% fees lost $48,000 in fees and $55,000 in lost compounding returns, resulting in a $103,000 gap.
Again, it pays BIG to be mindful about where exactly your money is going.
But it’s not the only thing you should set your mind to.
Secret #5 – Participate in Money-Generating Activities
According to “Rich Habits” author Tom Corley, the majority of self-made millionaires have at least 3 or more streams of income.
Why do they do this?
When you create multiple streams of income, you go beyond the “trading time for money” model that the grand majority of people live by. It’s as if you clone yourself to do 2-3 jobs at once.
How is this possible?
The trick is to position yourself on the receiving end of the financial equation. This is usually accomplished by owning an asset that someone else needs.
Example 1 – Rental Properties
Rental properties are the classic example of an income-generating asset.
You own the property. The tenant needs a place to stay, and they will pay you to live there. Thus, you’re on the receiving end of the financial equation.
For many landlords, this arrangement ends up being a win-win situation. They can then use the tenant’s money to not only cover the cost of the property’s mortgage, but also to make some money on top as well.
Let’s say you own a rental property that generates $1,000 per month, but it only costs you $600 per month to maintain the property. That’s a profit of $4,800 per year for you – and that’s even before we talk about some of the tax breaks the IRS gives you on top.
Now imagine you have 5 of these properties. Now you’re looking at $19,200 of additional income for the year.
Example 2 – Dividend Stocks
Real estate isn’t your thing? Another classic source of income is in owning dividend-paying stocks.
Dividend-paying stocks are a special set of stocks you own that pay a quarterly dividend (cut of the company profits) to its shareholders.
The more of these stocks you accumulate, the more income you stand to earn – all for doing nothing more than simply being the owner!
Example 3 – Business Income
This one is a favorite income source of mine because the term “business” can apply to just about anything.
You could have a traditional business, either alone or with partners. Or you could do what I do and run a website that makes money from the traffic and advertising.
If you’d like even more ideas, don’t worry! There are plenty more to choose from.
Check out our giant list here.
Learning About Money
Keep in mind that even the act of learning about how to make more money is itself an investment (of your time).
Financial education isn’t something that’s necessarily taught to us in school or even by our parents. In many cases, we have to look to those who have mastered the art to learn their ways. Usually this can be done through reading their books or websites.
But when we do, it gives us an advantage. Making money is a system like any other. Learn the rules, and you’ll find the confidence you need to make the right choices, minimize risks, and take actions that will result in financial gain.
The Bottom Line
Again – becoming Rich is less about working longer and harder, and more about working smarter. It’s more about using the tools that are available to produce results you would have never gained otherwise.
None of these secrets are particularly unique or exclusive. Anyone at any income level can use them. Even if you manage to save an extra $1,000 more this year, that’s better than where you were before.
I can’t encourage you enough to start exploring each one, and to figure out how you can implement it into your own life. The sooner you do, the quicker you’ll join the club. And I think you’ll be pleasantly surprised at how quickly you’re able to build your wealth at a rate beyond anything you previously imagined was possible.
Photo credits: FreeDigitalPhotos.net, Pexels, Pixabay