Knowing what has happened in our economy over the last five years it’s hard to imagine how anyone has not only survived but profited from it. But long time readers know that’s exactly what’s happened to a small fraction of the people in our country. We may have less rich people now than we did five years ago, but the ones we do have are even richer than they were before our economy nearly collapsed in 2008.
Being rich and staying rich are two different things, as many people have found out in the last couple of years. A great many people who were rich before the recession are no longer as financially secure.
Many people mistakenly believe that if they could just win the lottery or strike it rich in some way or another all of their problems would be solved. That’s not so. As someone who has risen the ranks financially, I can tell you that it’s as hard to stay rich as it was to get there.
Learning how to hold on to your money is just as important as learning how to make it. If you are in the process of building your wealth or are fortunate enough to have already made a fair amount of it, there are five wealth destroyers you should avoid to protect your fortune.
Wealth Destroyer #1: Taxes
Taxes can eat up a sizeable portion of your income if you don’t know how to shelter it correctly. Rich people tend to be more financially literate than the average citizen because they know how huge a portion the IRS will take of their income if they let them. Typically the very wealthy are very versed in what is taxable and what is not, after all the IRS takes from the corporate taxes they pay, real estate taxes, capital gains tax, as well as ordinary income.
What the rich do to keep their money away from the lecherous fingers of the IRS is to plan accordingly and be proactive throughout the year. They take advantage of tax-favored retirement accounts. High income earners can shelter assets that produce ordinary income like interest and short-term capital gains) into tax-deferred accounts like an IRA or annuity. Likewise they should place assets that produce long-term capital gains and dividends (like stocks and municipal bonds) into taxable accounts. This spreads out their income so the wealthy don’t pay huge tax bills every year.
High net worth individuals also harness the power of tax write-offs. They further reduce their income by itemizing their deductions and taking more of them. Typically the wealthy run their own businesses so they deduct part of their mortgage, utility bills, car, dinners out, entertainment, health insurance, magazines, cable, internet and a host of other bills that the average person doesn’t. When it comes to taxes, business owners come out on top.
Wealth Destroyer #2: Inflation
Inflation is one of those things that’s talked about a lot but rarely recognized when it’s happening. Small increases in the cost of goods and services may seem harmless, but over time inflation can eat away at your fortune faster than you anticipated. Let’s say inflation is kept to a very modest amount, only 3 percent a year. Over time, perhaps 25 years though, that dollar you had shrinks to less than half its original purchasing power, around 48 cents. Meaning a person who thought they had enough money for life with $1 million is reduced to $478,000 in 25 years. That’s huge.
To combat inflation and its wealth destroying power it’s important to invest in assets that keep pace with or outrun inflation. Investments like equities, Treasury Inflation-Protected Securities (TIPS), commodities, international bonds, and real estate investment trusts (REITs) are all good counter balances to inflation. The wealthy know the worst thing they can do is put their money in the bank for the long-term. They always invest their money, you should too.
Wealth Destroyer #3: Fortune Hunters
How is it that more rich people get sued and slapped with lawsuits than the average person? Once people find out you have deep pockets they are more prone to target you. Simple incidents like car accidents and slip or falls at your home can turn into a quest to get some of your money.
The best way to protect yourself from fortune hunters is to have good insurance coverage. Get more than just the minimum coverage on your car, house, and business. It might be worth it to invest in an umbrella liability policy to cover additional extraordinary claims.
Wealth Destroyer #4: High-Risk Investments
Making money is addicting. Once you’ve made a bit of it, you want to make more and more of it. That leads people to take on more and more risk in their investments. Not a good combination.
Plus once you get rich people come out the wood work telling you about hot investment leads and opportunities. Most of the time these investments and business ideas are over-hyped and fraudulent.
The trick is to remember the investment strategy that got you rich in the first place and stay the course. Changing up your investment style once you have money is a recipe for disaster. Once you meet your goals and if you have money left over you can use those funds to dabble in higher risk opportunities.
Wealth Destroyer #5: Overspending
Of all the wealth destroyers, this one is the most dangerous. Not because it represents the biggest loss, but because most people never even know its happening. The people that allow their lifestyle to creep up little by little as more money comes in destroy their chances of building any real wealth.
People are prone to this wealth destroyer because it creeps up on them. They trade in their Chevy for a Mercedes. They trade in their discount bought clothing for designer duds. They trade in their modest accessories like watches and purses for premium brands. And so on and so on.
If you read any of the famous books about millionaires like, “The Millionaire Next Door” by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. you’ll find that the rich haven’t allowed their increase in income to affect their lifestyle. They don’t buy luxury clothing brands, drive luxury vehicles, live in mansions, travel via private jets, or shop at premium stores.
What they do and you should too is invest continuously, no matter what the current market cycle. If you listen to conventional media they will tell you that a market pull-back is coming. Those kinds of remarks make the average investor weary of putting their excess cash in the stock market right now.
This is the wrong way to think. As long as you are planning to invest your money for the long term (5-20 years) you will come out ahead. Like I said before, remember how you got rich in the first place and maintain that investment plan through the years.
It’s important to realize that once you get rich your journey is not over. It takes just as much work to stay wealthy as it does to get there. There will always be someone asking you for a handout or trying to get a cut of your fortune. You just have to know what to look out for.
And now you do.
To your future and mine!