Have you ever wondered how the wealthiest people in the world got to where they are? Or how they stay at such a level of wealth, despite spending and losing money on investments on a regular basis?
There’s no surefire strategy to become wealthy or ensure your wealth is protected, but there are some basic principles and common themes that have helped millions of people become millionaires—or even billionaires.
Avenues of Wealth Accrual
Most people become wealthy in one of a few main ways:
- Many people receive an inheritance when a parent dies, but this isn’t an especially common way of becoming wealthy. Among the wealthiest 5 percent of households, the average inheritance was $1.1 million. Comparatively, the bottom 50 percent of households received a mere $68,000. Either way, this isn’t an avenue that’s under your control.
- High-paying positions. Somewhat more commonly, people become wealthy from high-paying positions. They get jobs that earn high-six figures or even seven figures per year, and are able to save a fortune over the course of a decade. It’s possible to “climb the ladder” to one of these positions, but it’s not an available path for everyone.
- Instead, the most available path to accruing wealth is through investments, like businesses, stocks, and real estate. Because this path is the most accessible, we’ll spend the most time discussing it.
Once you have substantial wealth, you’ll need some kind of strategy in place to protect it. If you leave it in a savings account, it won’t generate enough interest to keep up with inflation. If you get a divorce, your spouse could gain control of half your assets (or more). If you’re ever sued, or if your business goes under, your personal assets could be at stake.
Fortunately, there are several asset protection strategies a wealthy person can use to protect their assets, including:
- Offshore trusts. According to Alper Law, offshore trusts are generally not accessible to U.S. courts; in the event of a divorce or threatening lawsuit, an offshore trust can keep at least some of your assets safe.
- More straightforwardly, you could get an insurance policy (or multiple policies) to protect your wealth. For example, you might invest in an umbrella liability insurance policy.
- Holding your wealth in a number of different types of assets and different locations makes it harder for any single event to cause a catastrophic loss.
- You can also distribute your wealth in a way that makes it harder to target. For example, you could give portions of your wealth to your children or family members you trust.
Accruing Wealth Through Investments
Investments are the most reliable way to build wealth, since anyone with a bit of extra money can invest, and the right investments can turn even the smallest amount of money into a fortune.
Wealth building via investments relies on compound interest, or a snowballing effect. When you make an investment that earns interest, and you reinvest that interest, you’ll begin earning interest on both your initial principal and your new interest, resulting in practically exponential growth. At an interest rate of just 7 percent, you can double your money every 10 years or so. In other words, if you start investing at 20, your money will double 4 times by the time you’re ready to retire at 60; $10,000 becomes $160,000, and $100,0000 becomes $1.6 million.
These principles can help you achieve results:
- Start early. Start investing as early as you can. As you’ve seen, just a few years of extra growth can greatly increase the total value of your portfolio. Ideally, you’ll begin investing in your 20s. Starting early also gives you a handful of other advantages. For example, you’ll have more time to learn and master the art of investing; with decades of experience, you’ll be able to make more educated plays later on in your investing career. This also gives you more time to recover from mistakes; if you make a bad investment at age 20, it’s no big deal. If you make a bad play at 60, you may have a harder time recovering.
- Be consistent. Don’t just dump some money into an investment and hope it pans out. Investing is something you have to do consistently over time; put money into your account every month to stay on track for your goals. This will help you stay committed to your long-term goal, and prevent you from losing personal interest, motivation, or momentum. This will also allow you to take advantage of dollar cost averaging Dollar cost averaging is a strategy intended to shield people from volatility. Basically, you can count on the price of a given asset (like stock in a given company) to go up and down in a nearly-unpredictable way. If you buy too much at one time, you could end up buying at too high a price; but if you commit to buying a smaller, fixed amount each month, eventually you’ll see both high and low prices. Over time, your cost will average out.
- Choose the right mix of assets. There are many worthy asset types to invest in, including businesses, stocks, bonds, and real estate, each with pros and cons. Choose assets that make the most sense to you, and gradually decrease your risk exposure as you get older. For example, stocks tend to be higher-risk, higher-reward, while bonds tend to be lower-risk, lower-reward.
- Rely on retirement accounts. Prioritize putting your money in retirement accounts, like 401(k) plans or IRAs; these accounts typically offer tax advantages that help you reap a higher total growth rate.
With these strategies, almost anyone can become wealthy over time. You don’t need an exorbitant salary, nor do you need to rely on a windfall to get here. All you need is a bit of investing knowledge, and enough extra money to put into your assets of choice.