The way most Americans build wealth is no secret: Save, invest, repeat. How average people keep their wealth, though, gets a lot less attention.
It boils down to how they handle risk. It’s hard to accumulate wealth without taking some risks, but there are perils that “next-door millionaires” seem to avoid.
Next-door millionaires weren’t born into wealth. They’re the majority of millionaires, and they include teachers, small business owners and professionals who accumulate wealth gradually over time.
Here are some rules of thumb you might consider applying to your own finances.
Follow the one-house, one-spouse rule.
People who get and stay married tend to be much wealthier than never-married singles, according to research by Jay Zagorsky at Ohio State University.
But divorce can dramatically shrink your wealth. Zagorsky found that people who split up experience an average wealth drop of 77 percent.
Sticking with one house can pay off, too. Every time you sell a house and buy another, you’re giving up a chunk of your wealth to commissions and moving costs. If your home has appreciated substantially, you also may owe capital gains taxes on the sale. (The first $250,000 of home sale profit is exempt for singles, or $500,000 for a couple.)
Take risks, but don’t gamble
Safe investments don’t get you anywhere. The returns on Treasury bills and bank accounts insured by the Federal Deposit Insurance Corp. don’t even keep up with inflation, so you’re actually losing wealth over time. But next-door millionaires aren’t speculators, either. Millionaire portfolios tend to be widely diversified, with investments in stock funds, bonds, cash and real estate.
The most popular investment choice? Low-cost Vanguard index funds, according to the 2014 CNBC Millionaire Survey.
Don’t DIY your money
Seven out of 10 millionaires surveyed by the Spectrem Group in 2014 used financial advisers. Many said the primary benefits were improving their knowledge of investing, having access to a wider range of investment opportunities and boosting their returns.
You don’t necessarily need a fleet of advisers, especially if you don’t have a lot of money. But expert guidance is available in many forms. You can, for example, use the target-date retirement fund options in your workplace 401(k) or opt for an automated financial adviser that uses computer algorithms to invest and rebalance your money.
THINK THINGS THROUGH
The loathing some people have for taxes can lead them to do pretty stupid things with their money. They might buy variable annuities to defer taxes, not realizing that excessive fees can erode their returns and that they could pay more in taxes in the long run. Or they keep a mortgage just for the tax deduction, which is like giving someone a dollar just to get a quarter or two back in change. Tax considerations shouldn’t drive your investment and financial decisions.