How to tell if you're rich? Who is “rich” and what is “fair"?

One of the biggest points of contention in the last election was whether the rich pay their fair share of taxes. Polls show the majority of voters don’t believe they do.

Of course, this begs the questions: Who is “rich” and what is “fair"?
 

Answers are largely a matter of opinion. But here is a fact: IRS figures show that the top 10% of income earners make 43% of all the income and pay 70% of all the taxes. Is that fair? If not, how much should they pay: 75% … 90% … all of it? And how about the now widely recognized fact — thanks to Mitt Romney’s secret videographer — that 47% of Americans don’t pay any income taxes. Is that fair? Opinions will vary.
 

According to the IRS, the top 2% of income earners — the ones who just had their marginal tax rate raised 13% to 39.6% — already pay approximately half of all income taxes. President Barack Obama says it’s about time these folks “chipped in.” What a kidder.
 

And who is “rich"? For today’s discussion, I’ll leave aside the truism that you are rich if you enjoy good health, a loving family, close friends and varied interests. Politicians (and most voters, apparently) seem to believe that a person’s wealth can be determined by his or her income. I would argue that you determine real wealth by looking at a balance sheet not an income statement. But why not look at both?
 

According to the Tax Policy Center, if your annual household income is $107,628, you are in the top 20% of income earners. If your income exceeds $148,687, you are in the top 10%. You are in the top 5% if it is $208,810. And if your household income is $521,411, congratulations. You are in the top 1% … and perhaps demonized by those who view hard work and risk-taking as a matter of good genes and good fortune.
 

However, net worth is a far better measure of wealth, in my view. According to the Federal Reserve Survey of Consumer Finances, a net worth of $415,700 puts you in the top 20% of American households. You are in the top 10% if your net worth is $952,200. (This jives with the findings of Dr. Thomas J. Stanley — author of The Millionaire Next Door — that one in eight American households has a net worth of $1 million or more.) If your nest egg totals $1,863,800, you are in the top 5%. And — trumpets please – if you have a household net worth of $6,816,200, you are again in the top 1% … and possibly frowned upon by redistributionists who resent folks who live beneath their means, save regularly and handle their financial affairs prudently.
 

How do you get rich if you aren’t currently? The basic formula is pretty simple: Maximize your income (by upgrading your education or job skills). Minimize your outgo (by living beneath your means). Religiously save the difference. (Easier said than done.) And follow proven investment principles. (Which we write about here every week.)
 

Most millionaires — folks with liquid assets of one million dollars or more – are not big spenders. Quite the opposite, in fact.
 

According to extensive surveys by Stanley, the most productive accumulators of wealth spend far less than they can afford on homes, cars, clothing, vacations, food, beverages and entertainment.
 

On the other hand, the wanna-be’s (people with higher-than-average incomes but not much net worth), are merely “aspirational.” They buy expensive clothes, top-shelf wines and liquors, luxury cars, powerboats, all kinds of bling and, often, more house than they can comfortably afford. Their problem, in essence, is that they’re trying to look rich. This prevents them from ever becoming rich.
 

It surprises many, but the vast majority of millionaires in the United States:

• Live in a house that costs less than $400,000.

• Are more likely to wear a Timex than a Rolex.
• Generally pay $15 or less for a bottle of wine.

• Have never paid more than $400 for a suit.
• Are more likely to drive a Nissan than a BMW.

• Spend very little on prestige brands and luxury items.

Yes, they’re frugal. But they’re also happy, not to mention financially free. They are not dependent on their families, their employers or the federal government. What a feeling.
 

Some can’t abide by this important lesson but the bottom line is clear: If you want to be rich, you have to stop acting rich… and start living like a real millionaire.

Alexander Green is the chief investment strategist at InvestmentU.com. See more articles by Alexander here.

- See more at: http://www.hcplive.com/physicians-money-digest/personal-finance/How-to-Tell-if-Youre-Rich-IU#sthash.edqDi0sq.dpuf

How the rich get richer and you can, too

By Mitch Tuchman

We all know, innately, how the rich get richer. Money begets money. But how does that actually happen, aside from compounding interest and purely financial factors?

You could take the cynic's view that the game is rigged. But the more accurate answer, backed by research, is that the rich get richer because of great parenting. How rich you become over your lifetime is directly related to how early you capture the basic truths of finance and investing.

You have seen the exception that proves the rule, the rich kid who blows his family's wealth in a generation through poor decisions. Chalk that up to absentee parents. Truly, teaching is the missing link.

According to a report in Time magazine :

In a paper unveiled a few months ago, researchers led by Annamaria Lusardi, professor of economics at George Washington University, found that an early understanding of financial concepts accounts for as much as half of the wealth gap between the affluent and those with low incomes . Lusardi also found an exponential effect: Those who acquire financial understanding early tend to accumulate assets faster and those with more assets tend to keep learning about personal finance because they have more at stake. (Emphasis added)

There are two powerful forces at work here, in terms of how the rich get richer. Let's tease them out so that you can benefit from the knowledge.

First and foremost, how the rich get richer has a lot to do with picking the right parents. Kidding aside, being born into a developed-country household, availing yourself of a quality education at a low relative cost, enjoying the benefits of a healthy diet and a safe childhood, all of these things give a person automatic advantages.

Yet there are people born into good circumstances who nevertheless seem to just "get by." They see the rich get richer and, quite rightly, question their own choices.

Instead, they should question, or at least examine, their parents' choices. Kids don't listen to what their parents say. They do what their parents do. A parent who saves diligently and consumes moderately is setting a very good, lifelong example for his or her children. A parent who constantly overspends and lives in debt does not.

How the rich get richer: They start early

But the kicker here is learning by doing: Teaching by example is great, but a child learns the power of saving and investing not only by seeing it done by others but by doing it themselves. Practice is how the rich get richer.

Once a young person gets a little bit of capital set aside, they begin to think more conservatively about money: How can I protect and grow that wealth? What are the risks to my plan?

How the rich get richer is by passing on simple lessons about compound interest, about risk and reward, and about the role of money in a healthy, happy life. Rich parents don't fear money; they consider it a useful tool. Those attitudes pass on, compounding in value with each succeeding generation.

Working hard at getting an education is a great base. The simple act of periodic, automatic saving is another excellent lesson. Prudent, effective investing is yet another.

Great fortunes are often built not on chance events but on steady, risk-controlled investment plans that take into account the best practices of generations . 

http://www.marketwatch.com/story/how-the-rich-get-richer-and-you-can-too-2012-10-03

5 Reasons Why Most Don't Become Wealthy

5 Reasons Why Most Don't Become Wealthy

1.  Never occurs to them that it is possible to become wealthy
2.  Never decides to become wealthy
3.  Procrastination
4.  Inability to Delay Gratification
5.  Lack of Time Perspective


Are you unknowingly holding yourself back from financial independence?

"You can't get rich without working hard, taking risks, investing and reinvesting your profits."

'Drink Less, Work More', Billionaire Tells Non-Rich

By Robert Frank | CNBC – Thu, Aug 30, 2012 11:26 AM EDT

Gina Rinehart seems to court controversy - from her family lawsuits to her battles with Australian media.

 Gina RinehartNow, the Australian mining heiress, worth $19 billion and earlier this year thought to be the world's richest woman, has sparked another controversy in her latest column in Australian Resources and Investment magazine. (Yes, I am a registered reader online.) Rinehart rails against class warfare and says the non-rich should stop attacking the rich and go to work.

"There is no monopoly on becoming a millionaire," she writes. "If you're jealous of those with more money, don't just sit there and complain. Do something to make more money yourself - spend less time drinking, or smoking and socializing and more time working."

http://finance.yahoo.com/news/drink-less-more-billionaire-tells-152654355.html

The Science Of Getting Rich (Circa 1910)

The Science of Getting Rich

http://www.youtube.com/user/thesecrethome

 

Salaried rich versus the Super rich. Those making $1 million or more are the "salaried rich," since they make more of their money from ordinary income.

The Rich, Very Rich, and, Now, the 'Volatile' Rich

By Robert Frank | CNBC – Fri, Jul 13, 2012

The rich tend to be lumped together as one economic group, as if people earning $250,000 a year (or even $1 million a year) are pretty much the same as those making $50 million.

But a new analysis of top incomes tells us that there is a big difference between the super-rich and the merely rich in how they earn money.

The paper, from Roberton Williams of the Tax Policy Center, compares two sets of 2009 IRS data. One group is American tax filers reporting income of $1 million or more. The other is for the 400 top earners in America, who made an average of $271 million each.

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Americans with an adjusted gross income of $1 million or more make about a third of that from salaries and wages. Capital gains used to account for more than a third of their income, but since 2000 that share has fallen to 17 percent. Today, the largest share of their take comes from "other income" - mainly earnings from partnerships or S-corps, as well as other capital gains.

The "fortunate 400" - or top 400 earners - make much more of their income from capital gains and other income than from salaries and wages, which account for only 9 percent of their income. Capital gains as a share of their income has also fallen, from 72 percent in 2000 to 46 percent in 2009.

What does this tell us? That those making $1 million or more are the "salaried rich," since they make more of their money from ordinary income. The super-rich make more of their money from one-time capital gains from the sale of stock or a business.

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Since the super-rich are so dependent on capital gains, their incomes have become much more volatile, falling 40 percent between 2007 and 2009. As a group, they also change members rapidly, with 73 percent of them showing up on the list only once between 1992 and 2009.

Income for this super-rich group "has become much more volatile during the Great Recession, "Williams writes. In contrast, income for the merely rich dropped 18 percent.

The higher they fly, the harder they fall.

-By CNBC's Robert Frank

The Rich Get Richer!

Asians value education.  However, education alone does not create wealth.  It is what one does with all the knowledge that is key to getting rich.

Have you ever wondered why the rich get richer?  

By virtue of their wealth, they are able to take advantage of two components:

• time and
• risk.

They are able to set aside money at an early age and watch their savings grow through compounding over time.  The other component is risk.  If you have time on your side, you can afford to take on more risk and invest in instruments that can give you better returns.  The end result is achieving exponential returns on your savings.

The 3 ways to riches are:

• Born Rich
• Rich Professionals
• From Rags to Riches - Entrepreneurs

With time on their side, the rich can afford to take more risk and invest for higher returns.  This means that they would have the "holding power" to ride through any short-term losses.  

In the world of finance and investment, time is really money because money has a time value.  As an economic resource, money is capable of earning a  rate of return which we call interest.  With the compounding effect, your money can really grow exponentially over time.

The Next Level

With sufficient seed money, you get to invest in property, which is one of the favourite investment vehicles for the rich.  Through leveraged investing in property, returns can double or triple in the short term.  In fact, nearly everyone who has invested in property leverages.  For example, an investment of $100,000 can be leveraged 10 X , via a loan, to buy a $1 million property.  A 20% appreciation on the property would be equivalent to $200,000, representing a 200% gain on the initial capital invested.

Other than property, you may be wondering if the rates of return of 10%, 15% or 20% are realistic and possible.  The answer is a resounding 'yes' but you will need to take the risk with a multi-asset portfolio that can invest in equities, bonds, futures, etc.  It must be able to adopt alternative strategies, like investing short and using leverage, to capitalize on market conditions that are constantly changing.  In brief, you will need to include non-traditional investments to your portfolio.

The point is that investment is a continuous process.  You need to keep searching for instruments that can yield returns of 10% or more.  It takes time and effort but it is not impossible.

For those who are risk-adverse and growing their money at fixed deposit rates - the likely trade-off is that they will have to settle for lower returns and thus end up with a smaller retirement nest-egg.  The value of their money will shrink over time as a result of the ravaging effect of inflation and they might just end up poor.  The rich, on the other hand, will most likely attract better opportunities to them.  They will also be able to stomach risk and diversify their assets into different businesses to multiply their wealth.

Get richer.  Understand risk, manage it well and you will be rewarded over the long term.


Ref:  How to be a successful investor by William Cai

Everybody can be rich

The One Lucky Break or The One Supremely Shrewd Decision

What can we learn from the two partners who spent a good part of their lives handling their own and other people's funds on Wall Street?

These two partners Graham coyly referred to were Jerome Newman and Benjamin Graham himself.

• Some hard experience taught them it was better to be safe and careful rather than to try to make all the money in the world.
• They established a rather unique approach to security operations,which combined good profit possibilities with sound values.
• They avoided anything that appeared overpriced and were rather too quick to dispose of issues that had advanced to levels they deemed no longer attractive.
• Their portfolio was always well diversified, with more than a hundred different issues represented.
• In this way they did quite well through many years of ups and downs in the general market; they averaged about 20% per annum on the several millions of capital they had accepted for management, and their clients were pleased with the results.

In 1948, an opportunity was offered to the partners' fund to purchase a half-interest in a growing enterprise. For some reason the industry did not have Wall Street appeal at the time and the deal had been turned down by quite a few important houses. But the pair was impressed by the company's possibilities; what was decisive for them was that the price was moderate in relation to current earnings and asset value. The partners went ahead with the acquisition, amounting in dollars to about one-fifth of their fund. They became closely identified with the new business interest, GEICO, which prospered.

• In fact it did so well that the price of its shares advanced to two hundred times or more the price paid for the half-interest.
• The advance far outstripped the actual growth in profits, and almost from the start the quotation appeared much too high in terms of the partners' own investment standards.
• But since they regarded the company as a sort of "family business," they continued to maintain a substantial ownership of the shares despite the spectacular price rise.
• A large number of participants in their funds did the same, and they became millionaires through their holding in this one enterprise, plus later-organized affiliates.

Ironically enough, the aggregate of profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners' specialized fields, involving much investigation, endless pondering, and countless individual decisions.

Are there morals to this story of value to the intelligent investor?

• An obvious one is that there are several different ways to make and keep money in Wall Street.
• Another, not so obvious, is that one lucky break, or one supremely shrewd decision - (can we tell them apart?) - may count for more than a lifetime of journeyman efforts.
• But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity.
• One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door.
• One must have the means, the judgment, and the courage to take advantage of them.

Of course, we cannot promise a like spectacular experience to all intelligent investors who remain both prudent and alert through the years. We are not going to end with J.J. Raskob's slogan that we made fun of at the beginning: "Everybody can be rich."

• But interesting possibilities abound on the financial scene, and the intelligent and enterprising investor should be able to find both enjoyment and profit in this three-ring circus.
• Excitement is guaranteed.

Ref: Intelligent Investor by Benjamin Graham

Commentary:

Successful investing is about managing risk, not avoiding it.

At first glance, when you realize that Graham put 25% of his fund into a single stock, you might think he was gambling rashly with his investors' money. But then, when you discover that Graham had painstakingly established that he could liquidate GEICO for at least what he paid for it, it becomes clear that Graham was taking very little financial risk. But he needed enormous courage to take the psychological risk of such a big bet on so unknown a stock.

(Graham's anecdote is also a powerful reminder that those of us who are not as brilliant as he was must always diversify to protect against the risk of putting too much money into a single investment. When Graham himself admits that GEICO was a "lucky break," that's a signal that most of us cannot count on being able to find such a great opportunity. To keep investing from decaying into gambling, you must diversify.)

"Investors don't like uncertainty."

But investors have never liked uncertainty - and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be.

At heart, "uncertainty" and "investing" are synonyms.

In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks.

Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.