Financial freedom has never seemed more distant. All over social media, people debate the various ways in which they can achieve it. One source of information is all those people who have achieved financial freedom: high net worth individuals, or people worth more than $1 million in liquid assets. Data suggests that their investment strategies are far more accessible than you might imagine. Yet, some 74% of adults doubt they will ever become high net worth individuals.
Strategies High Net Worth Individuals Use
High net worth individuals have succeeded in accumulating assets. This has two impacts: first, it increases immediate wealth. Secondly, over a long period, such as a decade, or decades, the compounded income earned and saved and reinvested over that time, gets bigger and bigger at a faster rate. It's why high net worth individuals get richer. High net worth individuals, interestingly, use strategies which virtually anyone can replicate. For them, retirement accounts such as individual retirement accounts (IRAs), a gold and silver IRA, and 401(k)s, are a vital part of their strategy, forming 55% of their wealth.
This is a fairly simple and replicable strategy, but one which many people do not use. In fact, most people do not even understand what "net worth" means. But why does this simple strategy work?
Accumulating Wealth is Crucial to Financial Freedom
What makes retirement accounts so powerful is that they are tax-free or tax-deferred, allowing investors to grow wealth for decades, without having to pay any tax. The tax savings can be invested, acting almost like a government loan you can use to get richer than you otherwise would. Those advantages are hard to recreate outside a retirement account. So the first benefit of this strategy is the "loan" you get from the government by not having to pay taxes, a loan which compounds into a large sum over time.
The best advice of the past era was written by Thomas J. Stanley and William D. Danko, who suggested a path to financial freedom in their book, The Millionaire Next Door, advocating for saving, accumulating assets and buying as few luxury or necessary items as possible, and leading very simple lives.That path was enough to achieve financial wealth during more prosperous times where market returns where far in excess of ours. SInce then, millennials have faced a sharply harsher economy. With lower real wages, high unemployment, lower market returns and the highest inflation rate in 40 years, today's adults need a more updated version of this advice.
Stanley and Danko's advice to accumulate assets still rings true. Wealth, fundamentally, is about the amount of assets one has versus liabilities. What you own or control and which gives you an income, is an asset. What you have to pay into, is a liability. In Stanley and Danko's work, they highlighted that many millionaires "next door" led such simple lives that even their homes looked like everyone else's. Famously, Warren Buffett has lived in the same house for decades. Why? Because a house isn't an asset unless you're renting it out, plan on selling it. Strictly speaking, it's a necessary liability. What you're after are assets: stuff that brings in money.
