With all the talk of wealth inequality, it makes sense to take a look at what it takes to be considered rich in the United States.The chart below shows the net worth of Americans broken up by percentiles. I personally like looking at this from time to time to see how I compare to my peers.
It’s important to understand the difference between income and net worth. Net worth is what is left after subtracting your liabilities (what you owe) from your assets (what you own). Income is what you earn each year, and a high income doesn’t necessarily translate to a high net worth. Keep reading to find out the basics to building your net worth.
1. Spend Less Than You Make
Spending less than you make is simple to understand but hard to follow. If you don’t spend less than you earn you will never get ahead.
Using credit card debt to cover overspending is one of the largest wealth killers. It should be avoided at all costs. If you do have credit card debt, I talked about strategies to consolidate it in my previous post.
In addition, be careful of lifestyle creep. When you increase your income, enjoy it, but don’t forget about your future. Avoid spending 100% of your raises on upgrading your lifestyle. I would recommend saving 50% or more of future raises to avoid delaying retirement.
2. Focus on Earning More
People will spend hours searching for the best deals to save $20 but won’t spend an hour preparing for a salary negotiation that is 100x more impactful. Saving $20 bucks is great but making $2,000 more a year is even greater.
Some of the most common advice given on building wealth is to cut spending. However, this has lower limits because you still need a place to live and food to eat. On the other hand, increasing income has no upper limits. Cutting spending is good, but finding ways to increase income when possible is even better.
3. Invest Wisely
A recent report from the Federal Reserve showed that the wealthiest 10% of Americans own 89% of all U.S. stocks.
A common trait among high-net-worth individuals is they buy assets with the potential to increase in value. Examples of those assets would be stocks, bonds, real estate, and more.
When investing, simple beats complex. Avoid buying investment products you don’t understand. To keep things simple, automate your savings and buy investments you understand.
4. Time Matters
The best time to get invested was yesterday, the next best time is today.
The earlier you start the longer you have to benefit from compound interest. If there is one thing to take away from my blog post, it is to start investing early.
At PMG Wealth Management we focus on helping clients reach their financial goals no matter where they start out. If you would like a second opinion on your financial situation, please call or email us to schedule an appointment.
Disclaimers and Sources:
Top 10% of 89% of stocks: Link here
Net Worth Chart: Link here
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investments in real estate may be subject to a higher degree of marker risk because of concentration in a specific industry, sector, or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.