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Financial advisors to more than 1,000 physicians, two experts go over the top-five wealth management habits they've noticed in their more affluent clients.
As advisors to more than 1,000 physicians and other high net worth individuals throughout the country, including many dermatologists, we have observed the following five habits of wealthy Americans:
1. They spend less than they earn.
While this may seem like a no-brainer, it’s a concept that many Americans struggle with, including many dermatologists. The “keeping up with the Joneses” mindset can be a recipe for disaster, causing people to buy things they can’t afford and ultimately don’t need. While many people think of the wealthy as celebrities like Paris Hilton, who lavishly spend on extravagant goods, many of the wealthiest people in America maintain low-key lifestyles and are careful to spend far less than they earn. For example, Warren Buffett has billions of dollars but has lived in his Omaha, Nebraska home for over 50 years without “trading up” to a mansion.
Of course, to spend less than you make, you first have to know how much you’re spending and making. Budgeting is key to this process. Thomas Stanley and William Danko, authors of the popular book “The Millionaire Next Door,” found that millionaires spend substantially more hours per month reviewing their budget than non-millionaires do. No matter your net worth, by carefully tracking your finances, you can better understand where you’re spending too much and where you can afford to spend or save more. This helps you gradually accumulate more and more wealth over time.
2. They set financial goals-and stick to them.
To some, setting financial goals may be as simple as stating, “I want to be able to retire at age 60,” but this general approach isn’t very effective. Your financial goals should be clearly defined, and you should have a plan in place and deadlines to help you reach them. According to Steve Siebold, author of How Rich People Think, many middle-class people struggle with having loosely defined goals or give themselves too flexible of deadlines. The wealthy, on the other hand, “have firm goals with ‘do or die’ deadlines.” Stanley and Danko also emphasize how much time the wealthy spend planning a wealth strategy, and found that the wealthy spend twice as much time doing so than others. Setting goals, making a plan to achieve them, and then measuring your progress toward those goals are essential financial habits, and a qualified financial advisor can help you with these tasks.
3. They redefine “the American dream.”
Many wealthy Americans are beginning to realize that they don’t need the traditional American dream of owning their own home. Manhattan saw its number of leases for “luxury apartments” (those charging $10,000 a month or higher) double from 2009 to the third quarter of 2010. While most people don’t want to pay $10,000 for rent, many people can understand that renting is appealing for those who are uncertain either about the housing market or their own plans for the future. For example, do you like to move around a lot? Is your job secure or subject to change? If there’s uncertainty about your living situation in the future, it’s probably more fiscally responsible to rent. Renting also means you avoid the carrying costs of buying, such as property tax, homeowners insurance, renovations, maintenance, etc.
It’s important to remember that you’ll have many financial goals throughout life-saving for your children’s education, saving for retirement, paying for health care-and, depending on your situation, these may be more important to you than buying a home. That’s not to say the American dream is dead-but it is changing. A MacArthur Foundation survey from March 2013 found that 61 percent of those surveyed agreed that, “for the most part, renters can be just as successful as owners at achieving the American dream”-and judging by the habits of the wealthy, they agree.
4. They save more.
During their research, Stanley and Danko found that millionaires save much more than the average person does-on average, 20 percent of their income. And, for the top one percent, that number is much higher. According to research from American Express Publishing and Harrison Group, the wealthiest one percent of Americans had a savings rate of 37 percent in the second quarter of 2013. While it makes sense that those who make more can also afford to save more, it comes down to creating a habit of saving. It’s easy to say that you’ll start to save “when you can afford it,” but by making it a practice to save at least a small amount of your income now, you set yourself up for financial success down the road. Even if you can only afford to save a small amount of your paycheck, setting this money aside and “paying yourself first” can help you establish a higher level of financial security.
5. They plan to retire later.
It’s many people’s dream to retire at 40-but not the wealthy. A survey from wealth research firm Spectrem Group found that almost one third of the highest earners (those with annual earnings of $750,000 or more) in America don’t plan to retire until they are at least 70 years old. Fifteen percent of the highest earners say they never plan to retire. For those making less than $100,000 per year, that number drops to 6 percent for both categories-most of this income bracket plans to retire by age 65. It makes sense that the longer you work, the more you increase your earning capacity and the more wealth you can eventually accumulate. Keep in mind that the longer you put off retirement, the larger your Social Security benefit will be as well.
If you do plan to retire later in life, it’s important to have a backup plan. After all, you never know when a disability will prevent you from working, or if health care bills will dominate your finances in your later years. It is important to build up retirement savings before your golden years and to have sufficient insurance coverage so that you’re not completely dependent on your later years’ earnings for your retirement.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.