The three-step plan for becoming financially wealthy and how to be wealthy without the money.
In this episode you’ll learn:
- The results of two recent surveys on wealth, investing and retirement planning.
- How much money do people believe they need to consider themselves wealthy.
- How is wealth distributed across the U.S. population and how wealthy are Americans?
- Why you need a simple financial plan.
- What are the three steps to becoming financially wealthy.
- How to live like you are already wealthy.
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What does one have to do to become wealthy? In this episode, David dives into what defines wealth and explores three steps that you can take towards a more lucrative future. Charles Schwab and Stash both sent out surveys that surprised David with their statistics. The questions in the surveys surrounded how people planned on funding their retirement. 22.8% of participants said that they did not have a plan for retirement, and while over two-thirds considered themselves savers, 59% said that they live paycheck to paycheck. While most would love to become wealthy, how do most expect to get there?
The expectation of what it takes to become wealthy vs. reality
According to the 2016 Federal Reserve survey of consumer finances, 15% of respondents report spending more than they earn. 44% have difficulty paying credit card balances and keeping up with regular bills and expenses. Despite these statistics, 60% of the Schwab survey respondents said that they expect to be wealthy one day. This is surprising, considering that those who took the survey considered $2.27 million to define the minimal boundary of monetary wealth.
Most households don’t come close to reaching that kind of net worth, but most aren’t considering the value of Social Security. The Federal Reserve estimates that the median value of Social Security benefits for households in today’s dollars is about $172,000. That, combined with any amount that you choose to save and invest now, adds up to future wealth.
David explains that one of the reasons for a lower average net worth is that the wealthiest 1% of the US population has a larger slice of the overall wealth of the nation. Their wealth constitutes 38.6% of the nation’s wealth. The wealth belonging to the top 1% has grown at an annualized rate of 5.4% per year since 1990. While the overall wealth of the nation has obviously grown since 1990, the wealthiest still own a larger piece of the pie. How does one become included in the wealthiest 10% or so?
The foundational key is to have a plan. According to the Schwab survey, 28% of the respondents have a written plan, 46% have thought about goals they want to achieve but haven’t written them down, and 26% have no plan at all. Planners tend to have the upper hand when it comes to saving and building wealth over time. Goals and plans don’t have to be complicated, but knowing where you would like to be in ten or fifteen years, and the steps you need to take now to get there, is vital to success.
The first step towards wealth: Increasing your income
David explores three steps to take towards becoming wealthy. To begin with, you need to increase your income. You need to be making more than the median income of $60,000 per year. David says that it will probably take making $100,000 or more per year to reach the desired $2.27 million net worth. There are plenty of ways to increase your income including, getting better at what you currently do, asking for a raise, creating a deal with your business where you make a percentage of the revenue, and starting a side business. Be creative and have a plan.
The second step towards wealth: Increasing your savings percentage
How much are you saving? According to the Stash survey, 41% save less than 5% of their income. Only 11% save more than 15% of their income. David explains that you really need to be saving more than 15% if you want to become wealthy. Another way to save money is to keep your current standard of living—even as your income increases. Resist spending money on the bigger and fancier, and instead fill your life with rich experiences. Keep a budget and live comfortably well within your means. Don’t increase the budget for things that you don’t need as your income grows.
The third step towards wealth: Increasing your investment returns
The wealthy have higher investment returns. One of the ways you can become wealthy is to continually educate yourself on how to get the most out of your investments. The Stash survey revealed that 74% of the respondents don’t invest in stocks outside of a retirement account. That is poor planning if you are wanting to increase your wealth. Diversify your investments to increase the opportunity that you have for a better return on investment.
Some are scared of the perceived risk of investing, but it is important to realize that you don’t have to put everything you have into investments. Begin small, learn the processes and the options available, and keep your portfolio diverse. David distinguishes between volatility and risk as well. The market will change—as it always has—but risk is derived from financial harm caused by losses, not volatility.
How do the incredibly rich create higher returns on their investments than the rest of the population? The answer is through higher return drivers. The very rich invest less in cash and bonds, with most of their investments put towards stocks and alternatives. The alternatives category includes startup companies, buyouts, hedge funds, and real estate. Their lower-returning investments are kept to 25% of their portfolio. On average, US households have 44% in lower-returning investments. David encourages listeners to begin creating more diversity and higher return drivers through stocks.
It is key to remember that wealth can be measured in different ways. You don’t have to be monetarily wealthy in order to live a rich life. Relationships, experiences, being curious, and investing in opportunities to give to the world and make the earth a better place are all ways to live like you are already wealthy.
- [0:16] Schwab and Stash survey results.
- [2:49] Saving vs. living paycheck to paycheck.
- [4:29] How much does one need to be considered wealthy?
- [7:44] The value of social security.
- [9:23] The historical distribution of the country’s overall wealth.
- [11:33] The importance of having a plan.
- [13:38] Step One: increase your income.
- [15:10] Step Two: increase your savings percentage.
- [16:44] Step Three: increase your investment returns.
- [23:57] It’s not about optimization. It’s about diversifying and learning.
- [25:20] How to live like you are wealthy today.
Welcome to Money For The Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode 252, it’s titled “How to Become Wealthy.”
Two wealth surveys
This past week I was sent two surveys. One is a Schwab Modern Wealth survey. The other is by Stash, which is an investing app where you can start investing with as little as $5. Typically, when surveys are sent to me, there’s a press release from their PR firm. Here’s what Schwab’s PR firm for this particular survey said, Edelman. The title of their email said, “National survey finds fear of missing out fuels consumer spending.” The first line, “Over a third of Americans admit that their spending habits have been influenced by what their friends share on social media.”
The next survey Stash their PR firm is Bossbar. The email said, “Millennials say they’d risk the lottery as their retirement plan.” The first line, “New data from Stash reveals that 18% of Americans are basing their retirement plans on winning the lottery, and nearly 60% of millennials think the lottery is a good plan for their retirement.” These surveys… you always have to step back and first see how they were constructed. And then how was the question asked? Particularly the fact that 60% of millennials are basing their retirement plans on the lottery. But if you actually look at the question and how it’s phrased, it’s “How do you plan to retire? Select all that apply.” So you get to choose multiple answers. So they add up to more than a hundred percent, and the choices are: “I hope to win the lottery, I expect my children to help, move to a new country where it’s cheaper, move in with family members, get a part-time job doing something I love, I’ll live off my social security, I’ll marry someone rich and live off their money, I’ll live off of the savings in my retirement account, I don’t have any retirement plans.”
22.8% don’t have any retirement plans according to this survey. Now, both of these surveys were online surveys. The Schwab survey was adjusted to essentially be demographically representative of the US population. This Stash, it looked close, but they didn’t mention that it was actually scaled to match the demographics of the US. They tried to, but didn’t say that. What’s the margin of error? Plus or minus 3% in terms of these percentages. We’ll use these surveys as well as some data from the Federal Reserve to look at what does it take to be wealthy. How does one become wealthy?
To start the Schwab survey said, “59% of those who responded consider themselves savers.” They like to save. 65% said they’re “willing to sacrifice spending to save for later.” Yet with nearly two-thirds being willing to sacrifice to save for later, 59% said they live paycheck to paycheck.
In 2016 the Federal Reserve’s survey of consumer finances showed that 15% of families report spending more than they receive in income, which I guess would be worse than paycheck to paycheck. Typically, they make up that gap by taking money out of savings or investments or borrowing. According to the Schwab survey, 44% usually carry a credit card balance or struggle to keep up with bills and payments. This will be important when we look at what does it take to be wealthy. Obviously, you’re not going to become wealthy if you can’t even meet your existing expenses, like 15% of the US population, and you’re never going to be wealthy if indeed you’re living paycheck to paycheck and not able to save. Now, this Stash survey said 65% of the respondents were living paycheck to paycheck, but then they had different granularity there in which some said they were living paycheck to paycheck, but we’re also saving, which in my mind if you’re saving then that’s not really paycheck to paycheck.
The Schwab survey asked, well how much money did you spend on non-essential items in a typical month? And they defined that as spending on things like eating out, entertainment, luxury items or vacations. In other words, apart from rent, mortgage, and basic necessities. The amount was $483, about $6,000 per year only about 10% of the average income reported by those that responded. So I actually thought that was fairly low. But we want to talk about what does it take to be wealthy. And so the logical question is how much does one need to be considered wealthy? Schwab asked that, and the answer was $2.27 million. That was the average response against those that responded. 60% of those that are responding are optimistic they will be wealthy someday. 8% already consider themselves wealthy, another 7% within a year, 17% in five years, 20% in 10 years, and 8% within 25 years.
How wealthy are US households?
How wealthy though are US households? The Federal Reserve does a comprehensive report every quarter, it’s called the Z1 report. They take the financial accounts in US, it’s transaction level data, asset and liability data, full balance sheets, including net worth for households and nonprofits. And so schedule 101.h of that particular report, I guess B.101.h shows the balance sheet of households. They had, this is as of year-end 2018 total in the US $113 trillion of assets, 15 billion in liabilities, and a net worth assets minus liabilities of $98 trillion. Now, that’s huge, but you have to recognize there’s 128 million households in the US, so the average net worth of households in the US is $768,000. The median, which means 50% have below this amount is $100,000. Now, that’s well short of what individuals in that Schwab surveys said, one needed to have financially to be wealthy.
They said it needed to be $2.27 million. Now certainly some people are that wealthy, the top 1%, the average is $10.3 million in net worth. The average of the 1% and greater is $30 million. The 90th percentile has $1.1 million, so they’re less than that $2.27 million. The vast majority of the US population is not wealthy according to the expectations set out in that survey. The average wealth of the bottom 90% in terms of net worth is $194,000 and the bottom 10th percentile has a negative $1,000 net worth.
Now, it isn’t all bad news because these net worth, or these balance sheet type studies, what they don’t include is the value of social security. This is a huge retirement benefit both in the US as well as other federally sponsored retirement plans in other countries.
A study by the Federal Reserve estimates that the median social security wealth for households in the bottom 50% is $172,000. That’s the sort of taking future benefits, putting them into today’s dollars, which is a huge component because the median retirement wealth, so defined contribution plans, defined benefit plans for the bottom 50% it’s only $6,500. Half the population is just that they haven’t saved hardly anything for retirement. The next 45%, so not the top 5%, but between 50 percentile and the 95th percentile, they have on average $288,000 in private retirement wealth. Again, defined benefit plans, defined contribution plans. Then their estimated security wealth is about $343,000 because the more you earn, the more potential benefit and social security. And then finally the top 5% according to the Federal Reserve, has $716,000 on average in private retirement wealth with an estimated value in terms of social security, $478,000.So that’s kind of where things are in terms of the level of wealth. Most are far short of that in terms of this $2.27 million amount.
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