Introduction
You would be quite surprised to know that 80 percent of the millionaires you find in the world today are self-made millionaires and not born millionaires. Individuals who amass wealth or have fatter bank balances have disciplined financial habits and lead frugal lives than most of us don’t follow.
That is the primary reason that explains the proverbial saying that the ‘Rich keep getting richer’. Would you like to discover some of their insider secrets, although they are not very flashy ones?
On this parlance, let us unveil more detailed insights covering the blog topic- “How Do Most Millionaires Make Their Money”. Shall we get started here?
Money compounds when you keep saving
Are you still wondering as to why the billionaires or millionaires you find today are not born but are self-made? Yes, you had heard me correct. Most of the millionaires you find in the world today come from very humble beginnings.
Steve Jobs started Apple Computers from his very own garage before he joined Apple Inc. as the CEO and made it big. Microsoft Owner Bill Gates was a college dropout. Mark Zuckerberg, the founder of Facebook, wanted to find a networking platform on his college campus to be able to connect with his roommates. So here you understand how some of the world’s biggest giant heads were very simple people, while they initially started off.
The simple funda here is to start small and allow your money to grow. Do not break open your deposits. And allow your money to grow. As it grows, it keeps compounding, and you can have the dollar cost averaging method negate market volatilities for you.
The more you leave your money untouched, the less market risk you may actually have to face, as by then your market value of investments would have reached a substantial sum by then. And, you can be much more prepared than most of your peers are.
A SIP of $1000 per month for 30 years allows you to own $6,80,000 at the end of 30 years. Hence, you must start investing when you begin your career. This way, you can be steadfast in your goal to achieve wealth status by the time you retire.
How Do Most Millionaires Make Their Money?
Here are 7 different ways by which most millionaires make their money and continue staying rich. Helping you through with a rundown of the same:
Entrepreneurship and Business Ownership
A large proportion of the millionaires we see in the world today either started their own business ventures. Or, had their family heirloom businesses they used to run. When you own a business or an entrepreneurial venture, the potential to enhance your income multiplies. These are the reasons that contribute to the same:-
- Tax benefits
- Profits that get reinvested into the business stream itself
- Equity growth
Your income portfolios touch staggering heights when you leave your profits untouched or reinvest them back into your business domain. This way, you stay way ahead of your peers who do salaried 9-5 jobs in manufacturing or service sectors.
According to Fidelity’s Millionaire Outlook Study, it is noteworthy to know that more than 88% of the world’s richest individuals are self-made millionaires, and business ownership is the leading income generator over there.
Early Investments Via Stocks and Index Funds
You must consider investing in low-key stocks that guarantee a consistent RoI (Return on Investment). These are Index funds like the S&P 500 or low-cost index funds such as ETFs. Else, you can opt for dividend-paying stocks or aim to procure tax-advantaged investments wherein you plan your retirement or estate succession.
When you purchase low-cost dividend-paying stocks or ETFs, over the initial stages of your career plan, your investment portfolios can grow at a phenomenal pace in decades to come. You can choose tax-advantaged retirement schemes like 401 K or Roth IRA, to name a few, that can keep you way ahead of your time.
Self-made millionaires start investing early on account of the following reasons:
A- Interest Compounding
In most of your investment portfolios, the interest keeps compounding when you leave your investment portfolios untouched or put those interest earnings back into your portfolios themselves. This way, the market volatility is negated to a considerable extent indeed.
B- Panic buying/ selling does not hold water here
The self-made millionaires do not indulge in intraday buying or selling of shares or stocks. Rather, they buy stocks or dividend-paying shares at lower costs. This way, the interest rates compound on their portfolios and they grow at an exponential pace indeed, and this happens when you do not touch your portfolios over decades.
C- Dollar-Cost Averaging Method
Self-made millionaires use dollar averaging methods to reduce the impact of losing their capital vault over a newly announced recession spread, economic uncertainties or other downturns the market faces. They hedge their investments or take their money out the moment a recession phase is announced by the Government. This way, they have a safer edge over their investment portfolios.
D- Working example of how Index funds work to a common man’s advantage
A= S&P 500 Index Funds
B= Amounts to $500 per month
C= Term period= 30 years
D= Rate of Returns= 8% pa
E: At the end of 30 years, accumulated wealth = $6,80,000
Therefore, when you just invest via indexed funds using a low-key amount consistently for 30 years using the dollar averaging or the interest compounding method, here is how you amass $6,80,000, allowing to reach the million-dollar mark quite easily and you can use the corpus amount in lieu of retirement planning initiatives.
Real Estate- Both Residential & Commercial
When you invest in properties, the value of these properties appreciates over time. Therefore, when you hoard a lot of property units across the world, this is a neat and comprehensive strategy of owning a million dollars into your wallet.
Here are strategies millionaires use to build their wealth baskets. Helping you through a rundown of the above:
A- Buying/ holding properties
When you buy properties, you must hold properties and not sell them instantly. Appreciation in the value of plots happens over a period of time and does not happen instantly.
B- House hacking
You must live in one of your properties and rent out the rest of your units. This way, you create a passive source of income as you can avail rentals from your tenants, and at the same time, the property value of your housing units appreciates over a given period of time. Therefore, you maintain your investment portfolio and receive income from the same.
C- Leveraging property portfolios
Millionaires use property-leveraging techniques to help their property portfolios grow over time. Despite market fluctuations, you allow these properties to stand tall before you.
D- Availing tax benefits
When you own a lot of properties and you live in one of them while you rent or lease out your other property units, you can earn fabulous tax benefits from your property portfolio. These include:
- Anti- depreciation
- Mortgage tax deductions
- 1031 exchanges
E- Working example of how property units soar, helping you build robust portfolios
You can buy a 4-unit property using FHA loans. You live in one of them while you rent out the rest. You can buy similar properties to become a successful realtor in the years to come.
Practice highly skilled professions, plus live frugally
Highly skilled professionals include doctors, practicing chartered accountants, lawyers, software engineers, and research scientists. Although they earn fatter paychecks, they learn to live their lives far below their means.
When they live in modest homes in suburban neighborhoods, they save substantially over rents as the rentals are cheaper in suburban areas as compared to cities. These people buy used cars to drive.
Income Earned Frugal expenses + Divert wealth towards equitable sources of investments.
A program titled ‘From the home of the Millionaire Next Door’ revealed how the rich drove in used cars or lived in second-hand homes, went on to invest a major portion of their earnings through well-chartered investment plans. Warren Buffett still lives at his modest 2BHK in Omaha with frugal necessities and does not splurge at fancy dine-outs or dance at high-end discotheques.
Side hustles and multiple income streams
Self-made millionaires do not rely on a single source of income. They leverage their time and expertise to practice multiple streams of income-generating professions. We call them side hustles, and the income you generate from these side hustles can earn you a substantial level of passive income.
Side-hustles that generate a good level of passive money include:
- Freelancing/ Consulting
- Online businesses
- Royalties or licensing income
- Peer-to-peer lending
- Owning of digital assets like gold, stocks, dividend-enriched shares, etc
Family Wealth Inheritance
Only 20% of millionaires are born millionaires. They were born with silver spoons into affluent families that owned a significant portion of wealth in the form of investments, properties, and other types of assets. The millionaires inherit wealth from their fathers, grandfathers, or great grand dads who have worked hard to build their empires. However, these millionaires must invest via smart investment strategies to retain the same level of wealth for generations to come.
Tax Optimization Initiatives
You can avail of tax-saving benefits when you opt for long-term investment initiatives. Therefore, millionaires can save money by legally evading taxes. These are the tools that are predominantly being used in lieu of tax-saving or tax optimization leverage. The list includes:
- LLCs and S-Corps
- Capital gains and tax planning
- Real estate depreciation
- Donor-advised funds for charity giving
What are the key traits and habits of millionaires?
These are the key traits and habits of millionaires. Here is a rundown with respect to the same:
Shelling out long-term financial plans
Millionaires plan their rainy days years ahead of them. They invest in properties, buy dividend stocks at lower prices, and embark on taking up investments on a more comprehensive note. This way, they charter their long-term financial goals like planning to build a home, buying their dream cars, or arranging for immediate hospitalization of their near/ dear ones.
Financial discipline
Millionaires do not spend their income on fancy dine-outs or plan vacations on expensive cruises. They spend a productive portion of their time investing in stocks or earning income through side hustles. And this adds to their wealth on a huge scale.
Constant learning
Self-made millionaires constantly monitor markets and therefore adapt to the latest trends that are prevalent in the field of finance or investments. They do not miss an opportunity to learn a new financial technique or a leveraging tool that can boost their finances.
Avoidance of debt
The millionaires avoid investment debts as well as consumer debts. Here, they leave their investment portfolios untouched while they buy consumables to the bare minimum. This way, they avoid debts and need not shell out heavy interest charges to credit card companies.
Networking
The successful rich always make room for collaborating with like-minded individuals or peers who help them build their social circles while maintaining their wealth baskets.
The Bottom Line
The insider secrets millionaires use over the rest of the common middle class communities have been brought to you in a nutshell. So, which of the above techniques are you going to follow? Do mention it in the comments below!
Frequently Asked Questions or FAQs
How do the wealthy build wealth?
Answer: Individuals gain wealth and become wealthy when they invest in properties, buy stocks, or take up frugal lifestyles, as compared to most of us. Saving and investing are habit-forming initiatives that help them grow better net worth as compared to middle-class citizens.
Do you have to consult an expert in the field of personal finance or investment management?
Answer: Yes, when you approach an investment expert or a financial consultant in your early 30s, you get the right kind of financial advice to help you build a six-figure income base every month. You can figure out which attorney you may want to work with in case legal disputes arise over property or wealth distribution amongst your family members.
