But I’m moving the best posts to ESI Money and this one certainly qualifies.
As you know, we spend a lot of time here talking to the wealthy and asking them about their finances. My Millionaire Interviews are among the most popular posts on this site. And for good reason — who better to learn about money from than those who have done well with their finances?
Today we have a similar post, but from a different perspective. Jon at Money Smart Guides has had unique access to the wealthy through his past employment. This access allowed him to see what they did to become and remain wealthy. Today he’s sharing those thoughts with us.
I’ve also added some of my thoughts at the end of his main points.
So without further ado, here’s Jon…
Ever curious about how the wealthy live?
Wish you could see inside their finances in hopes of learning something?
I had the privilege of a view into how the wealthy manage their money when I worked for a high net worth financial planning firm. In order to invest your money with us, you needed at least $2 million. Not just $2 million in net worth, $2 million in liquid assets in order to invest.
We had a handful of clients that just met the minimum and a few that had close to $50 million. The majority were in the $10-$20 million range.
As a guy in my early 30’s who was somewhat successful with money, I didn’t know what to think working for the wealthy. At first I felt out of place to be honest. How could a guy making $50,000 a year really relate to and understand the needs and struggles of those worth 40 times that?
However as I met these people and became intimate with their financial lives and their goals, I felt more at ease. They were a lot like me. Except they could buy almost anything they wanted on a whim.
I also learned a lot. In fact, I have started to use many of the things I learned from working with them in my personal life to help me get ahead. Today I am going to share with you 10 lessons I learned. They aren’t listed in order of importance nor is any one most important. But taken together, you can go far.
10 Money Lessons I Learned Working For The Rich
#1. Appearances Are Deceiving
If you have read The Millionaire Next Door, you know that most of the wealthy don’t appear to be wealthy. They live in modest homes and don’t drive flashy cars.
While the sample size of my experience was small, only 300 wealthy people, I found this to be very true. When clients would come in for a quarterly meeting or just to say hello, you would never guess they were worth millions by just looking at them.
One client always wore shorts, even in the middle of winter! They didn’t spend their money on sports cars (except for a few of the doctors) or McMansions. They were smart with their spending and didn’t show it off.
At first, the lack of exotic cars disappointed me as a car guy. I would look out the window into the parking lot hoping to see something exciting. But all I kept seeing were Honda’s, Toyota’s and Subaru’s.
Takeaway Lesson: Being rich isn’t about appearances. It is about being smart with your money. Sure when you make it, you could buy a huge house and drive brand new cars, but chances are you are going to end up broke.
ESI’s Thoughts: Hahaha! I love the story about the guy who wears shorts! That’s me — I dress casually all the time and only “dress up” when I’m forced to (which I think has been three times since I retired — one being a wedding and another a funeral.)
#2. A High Paying Job Doesn’t Mean An Easy Financial Life
Many people might think that being a doctor means you have an easy financial life. While this is true in the long run, in the short term it is not the case. Most of the doctors we dealt with had a lot of debt. But they also had a ton saved for retirement.
Since they earn a high salary, they put everything they can into retirement accounts to shield it from income taxes. This means they have a lot saved for retirement but often had nothing outside of these accounts.
They tend to have education debt and huge mortgages too, which can be stressful. I almost had a heart attack when I was putting together a plan for one doctor and saw his monthly mortgage payment was $12,000! That was a quarter of my annual salary!
When it comes to high paying jobs outside of the medical field, your financial life is not a breeze either. Often you are in social circles with other wealthy people which leads to expensive cars, second houses and country club memberships.
A handful of our clients had country club memberships that cost them $10,000 a year and they never went. They just had a membership because it was a status symbol.
Takeaway Lesson: Don’t think that a high paying job means zero financial stress in your life. At the end of the day, your money decisions determine how much wealth you have. If you choose to spend all of your money, you will never get ahead financially. But if you save, regardless of your income, you can grow your wealth.
ESI’s Thoughts: It’s interesting to me that all these high net worth individuals are having their financial plans made by an inexperienced young person making $48k per year. If you want to read more about doctors, high incomes, and how their net worths shake out, check out Five Reasons High Income Doesn’t Lead to High Net Worth.
#3. Don’t Focus On The Cost, Look At The Benefits
Too many of us look only at the cost of things and not the benefit it provides. For example, you might scoff at paying a CPA $300 to do your taxes when you could file them with a piece of software for less than $100.
Or you might scoff at paying someone to manage your investments when you could do it yourself. For some people, doing your own taxes or managing your own investments is possible. But for others, it might not be the best idea.
For example, we had a long-time client come to us one day and tell us that over the time he worked with us to manage his money, he paid us over $100,000 in management fees. (He had been a client for close to 20 years.) To me, and probably you reading this, that sounds like a lot of money. But what he said next is why he was a client.
He said it was the best money he ever spent. In those 20 years, he saw a couple of recessions, the dot com bust, the housing market collapse and a couple of wars. Through it all, we held his hand and kept him invested for the long term.
He admitted if he was managing his own money, he wouldn’t have nearly the same amount as he does now. He would have sold out of his investments a long time ago and not come back.
Takeaway Lesson: Don’t just look at the cost of something, look at what you get out of it. Many times the price is only a fraction of the benefit. This applies to everything in life. Even clothing. A high quality suit that costs more money lasts much longer than a bargain suit. In the moment, that bargain suit looks like the smarter financial move, but in the long run, you save money by buying quality.
ESI’s Thoughts: According to studies, this is when financial planners really earn their money — by keeping you from doing stupid things with it when times get shaky. Of course if you can do that yourself, you don’t really need them.
#4. They Look Long Term
This lesson might be the most powerful one I learned and one that is still with me today. In many of the meetings, our clients talked to us about buying things and their thought process was completely different than the thought process of most people. They made decisions based on the future.
Those not financially well off tend to be short-sighted and the wealthy look long-term. In other words, those not financially well off are fixated on short-term happiness. They will buy the large flat screen even though they don’t have the money because it will make them feel good now.
The wealthy look at the long-term and see how spending and saving will affect their finances over time. The best way I can put it is this: When buying a car, the wealthy focus on the total price of the car. People who struggle with money look at just the monthly payment and end up spending a lot more overall.
Takeaway Lesson: Don’t get caught up in the moment and buy something, even if it looks like a good deal. Take your time and think through things to make sure it is the best use of your money.
ESI’s Thoughts: I’m trying to do more long-term thinking/planning myself. Once you’ve accumulated enough assets, this seems to be easier and more natural IMO.
#5. Even The Rich Don’t Budget
Up until now, my lessons have shown all of the right things the wealthy do. But here is one thing many don’t do. Budget. I can’t tell you how many times we sat down for a meeting to update goals and projections and the client was clueless on what they spend annually.
I quickly learned when creating a plan to add 10% to whatever number they said they spend a year because everyone tends to underestimate how much they really spend.
While it isn’t great that they don’t budget, it isn’t as big of a deal with the wealthy. After all, when you spend $10,000 a month and have $20 million, you can live comfortably for a long time. That is only about 1% of your net worth a year. But when you are spending $3,000 a month and only make $40,000 a year, you have a problem.
Takeaway Lesson: Make sure you know where your money is going. At the very least, save a portion of every paycheck, ideally 10-20% of it, and don’t spend more than you have in your checking account. If you can do this, you will make progress financially.
ESI’s Thoughts: Yep. The wealthy not having a budget is one of the surprises I found out when summarizing my first 100 millionaire interviews.
#6. Running A Business Is A Path To Wealth
Many of our clients started their own businesses. A good number were McDonald’s franchisee holders. (I didn’t know you could make so much money from selling cheeseburgers! My boss often joked about how he was in the wrong profession.) Others ran insurance companies. While we also had a bunch of clients that worked for someone else, the wealthiest of the group all ran their own business.
When you work for yourself, you are able take part in the profits of the business in addition to your salary. You also build equity so that one day should you decide to sell, you can realize a nice windfall of money.
Takeaway Lesson: Running a business is the best way to become a millionaire. While you can save and invest your way there as well, running a business will get you there faster. But running a successful business isn’t a piece of cake. It’s a lot of upfront cost and lots of hard work, but allows you to reap many rewards in the future.
ESI’s Thoughts: My interviews have revealed the opposite — most millionaires I’ve talked to do not own businesses. That said, I do believe that owning a business is a great way to become wealthy, especially if you want to accumulate more than just a million or two. If you notice, the most wealthy millionaires I interview almost always have a stake in a business.
#7. Being Invested Is More Important Than Timing The Market
We followed a passive investing approach with our clients. When you came into our office, we sat you down and got to know you personally. We wanted to know what your values and goals were so we could help you grow your wealth and do with your money what you wanted to.
Part of this investing strategy was to keep our clients invested in the market. We didn’t try to time the market when investing. After the market collapsed in 2008, we kept the majority of clients invested. We fielded a lot of phone calls from worried clients, but we held their hand and walked them through the uncertainty.
And it all paid off. By 2011, most everyone had seen their portfolio values higher than they were before the crash.
Of course there were some clients we did shift to cash, but only if there was a reason and it made sense based on their investment plan.
Takeaway Lesson: Don’t obsess with trying to pick the perfect time to invest in the stock market. Just get your money invested. Be sure you have a plan and follow it for the ultimate chance of success.
ESI’s Thoughts: Yep, good stuff here. I remember holding my own hand in 2008 and hoping my extra investments in the market would turn out well. They have, for sure. 😉
#8. Those Well Off Have A Genuine Spirit
If you watch the news or read magazines, you see a lot of hate towards the rich. The headlines scream they don’t pay their fair share in taxes or that the system is rigged against the average person. While I won’t get into that in this post, what I found is that many of the rich are honest, humble people.
They spend a lot of their time volunteering, donate a lot of their money to causes they believe in, and are more than willing to help out others. They are not what the media portrays the rich to be at all. In fact, they are a lot like you and me.
I remember our clients sending us Christmas cards in December along with cookies and chocolates. They would call the office to wish our employees a happy birthday. They would even send in thank you cards to thank us for walking them through some tough decisions they had to make.
Takeaway Lesson: While you might get ahead in the short-term by making money illegally or in a shady manner, at the end of the day, honest hard work and being a good person will get you much farther in life. And you’ll be a lot happier too.
ESI’s Thoughts: I’ve seen less giving among the wealthy than I expected, but I can testify that the millionaires I correspond with are very nice and cordial people. I enjoy getting to know them a bit behind the scenes — they seem like good, honest, friendly people that I would love to get to know even better.
#9. Thinking You Are Smarter Than The Market Is Trouble
As I mentioned, we invested based on a passive strategy. We invested our client’s money in low cost mutual funds and exchange traded funds and let the markets do their thing. While most of our clients were happy with this, there were a few who wanted to gamble and pick the hot stocks like Tesla and HerbaLife. There was one client infamous for this.
This approach was against our core value and after a couple of meetings, we came to an agreement. We put aside an amount of money for him to trade as he saw fit, and the rest of his money followed our investing approach.
Fast forward to the next year and this client called us up. He wanted to know why his wife’s portfolio returned 9% and his only earned 3%. We explained to him that her portfolio was 100% invested based on our philosophy and his was a mix of our philosophy and his trading account. If he didn’t trade, he would have earned a better return. He ended up asking us to move the majority of his trading money into the portfolio we managed.
Takeaway Lesson: You are not smarter than the market. No one is. Take what it gives you and spend your time enjoying your family, friends and hobbies. Sure you can have a play account to trade stocks, but make sure it is a small portion of your portfolio and it is money you can afford to lose.
ESI’s Thoughts: Haha! Yep. This is the same thing millionaires say about investing.
#10. Involve Your Spouse In Your Finances
The importance of involving your family in your finances is critical. There were 3 times when one of our clients passed away. Each time it was the male and each time, the wife came in to our office, with no idea as to how much money they had and which financial institutions they had accounts with.
Going through the loss of a loved one is hard enough. Imagine having to try to figure out the finances on top of that. Because of this, I made changes to how I handle the finances. While I still handle them, my wife and I have a monthly meeting where I show her where we stand and walk her through everything.
I created a spreadsheet with all of our accounts, who they are with and we walk through why we are investing and saving the way we are. The more information she has, the less stress there will be should I pass away and she needs to take over.
Takeaway Lesson: Make sure you include others in your financial life. Even if they have zero interest in it, make sure you have a document with accounts, account numbers, passwords, values, etc. and make sure your spouse or close family member knows where it is. The more information they have regarding the finances, the more they can focus on other things during their time of mourning.
ESI’s Thoughts: This is the main reason we updated our estate plans. I wanted to make sure things would be handled if something happens to me.
In all, working for a high net worth financial planner was great. I learned a lot, not only about investing, but also how the wealthy handle their finances. I’ve taken a lot of the things I’ve learned and incorporated them into my life to help me be more successful financially and I am seeing the results.
It is my hope that you can take away lessons from this post as well and become more successful in life and with your money.