How the Wealthy Invest Their Money
If you want to lose weight, you should study the habits of your friend who lost 25 pounds last summer.
If you want to hit a golf ball straighter, you’d be wise to take lessons from a PGA professional. And if you want to learn how to invest your money, you should observe (and mimic) what members of the wealthy class do. Because while you may not have the same sized “war chest,” many of their methods still work at scale.
3 Ways Wealthy People Invest Their Money
Whether they’ve become wealthy by inheriting a bunch of money or they’ve spent decades working and saving, investing plays a key role in every wealthy person’s financial growth and preservation. And unlike the average investor who puts all of their money into one “basket” and hopes for the best, they understand the power of diversification.
Here are some of the ways wealthy people invest their money to generate robust gains:
- High-Yield Savings Accounts
While it’s certainly not a sexy investment, there’s something to be said for stashing cash in a high-yield savings account. Many wealthy individuals will leave as much as 10 percent of their net worth in cash (which allows them to be liquid enough to quickly invest in new opportunities and/or pay for unforeseen emergencies out of pocket).
But rather than stuffing that money into coffee jars and burying them in the backyard, they use something called high-yield savings accounts. More specifically, they turn to money market accounts.
Money market accounts are simple interest-bearing savings products that allow you to take part in some of the market’s gains while still remaining insulated from losses. (Though losses can theoretically occur.)
You’ll find moment market accounts available at most banks and credit unions. And while the rates aren’t that much different than traditional savings accounts right now (due to the Fed cutting rates), they’ve historically produced much better returns.
- Index Funds
Index funds are the meat and potatoes of the average wealthy person’s net worth. These types of funds exist in a number of formats – including S&P 500 Index Funds and Nasdaq-100 Index Funds – and are basically large “basket-style” investments that are composed of hundreds of the nation’s largest companies. (Think Amazon, Berkshire Hathaway, Apple, Tesla, etc.)
By investing in these funds, as opposed to individual stocks, there’s less risk and volatility. If one stock crashes, you’re fine. While index funds can lose money over any given year, they’ve historically produced 7 to 10 percent annual returns.
Index funds can be held alone as part of a mutual fund or purchased within a 401(k) or IRA. If you’re saving for retirement, it’s a good idea to purchase multiple index funds as part of a Roth IRA. But if you need something slightly more liquid, a standalone mutual fund will suffice.
- Rental Properties
In addition to being invested in the stock market, many wealthy individuals choose to purchase real estate. They’re particularly fond of rental properties, which provide a multitude of benefits. The perks include tax advantages, monthly cash flow, depreciation, and the possibility for long-term appreciation on the property.
The key to successful rental property investing is to leverage other people’s money and to use a resource like a property manager to handle the day-to-day tasks on your behalf. When you take this route, it’s much easier to scale your portfolio and generate a significant amount of money each month.
You Can Do it, Too
Investing used to be reserved for individuals with high six- and seven-figure net worths. But that’s all changed. The democratization of investing that’s occurred over the past five years has changed the game for everyone. This includes you.
Thanks to innovations like crowdfunding, fractional shares, and online private lenders, anyone can get some skin in the game. It’s up to you to adopt the posture of a student and learn from those who are much wealthier and more successful than you.
It’s easy to look at wealthy people with disdain and jealousy. Yet, we’d all agree that it would be nice to be in their shoes. So why not take the opportunity to learn from them? Then, once you get there, you can choose to do good with your money. Sounds like a pretty good plan to us!