How do rich people stay rich? By working hard and avoiding high risks, according to a survey of the nation`s ”upper affluent” that reveals the rich get richer by avoiding junk bonds and the commodities market.
Instead, they invest in real estate and, to a lesser extent, stocks and money markets. In doing so, they`re confident they`ll get even richer, according to a recent Harris poll sponsored by Cigna Individual and Financial Services Co., a subsidiary of the insurance conglomerate that specializes in advising wealthy Americans on investment opportunities.
Harris pollsters surveyed 500 people based on census tracts of the nation`s richest neighborhoods, including Chicago and its suburbs. Each respondent made more than $100,000 annually or had a net worth of $500,000, excluding a primary residence.
”Until now, no one had conducted a decent study of this group,” says Charles Finn, Cigna`s vice president of financial planning, sales and marketing.
TRADITIONAL VALUES
The poll reveals a group distant from the mainstream in terms of privilege, but nonetheless strongly oriented to traditional values and family life. ”This was surprising. We had expected to find more yuppies, dinks, J.R. Ewings and jet-setters,” says Merl Baker, the Harris organization executive vice president who coordinated the February poll.
Eighty-two percent of those polled regard themselves as hard workers, with wealth largely self-made. The primary income gatherer is, on the average, 48 years old, married to a working spouse several years younger and has 2.7 children of college age or older. The richest among them are self-employed or own their own businesses.
”The lesson here, at least from a statistical standpoint, is that if you want to get wealthy, get your own business,” says Finn, observing that the self-employed and business owners constituted 42 percent of the sample but 68 percent of the real millionaires.
One businessman who successfully followed that formula is Jim Anderson, 51, president of James H. Anderson Inc., a Hillside company that does $12 million in ventilating and air-conditioning contracts each year.
Anderson left his father`s business with little money in 1973 to form his own company. He worked 10 to 12 hours a day, six days a week, and today he and his wife, Joan, own 81 percent of the company`s stock and a home in Barrington Hills.
The company made money the first and second year, ”but the third year, we lost more than I ever thought there was in the world. It was an expensive education,” Anderson said. ”That`s when I stopped being a salesman and started being a businessman.”
REAL ESTATE AS NO. 1
According to the survey, real estate is the favorite investment vehicle of the rich, attracting 79 percent of the group. Many plan to invest even more heavily in real estate in the immediate future than in any other investment vehicle.
Ranking closely behind are stocks (76 percent) and money market funds (71 percent). At the low end of the scale are junk bonds and commodities investments. Seen as too risky to invest in, they`re avoided by almost 90 percent of the country`s richest people, the poll found.
”Maybe it`s odd that a person in a high-risk business would stay away from junk bonds and commodities,” Anderson said. ”The difference is that I control the one, but I can`t control the other. You`ve got to recognize that you`re good at one thing, then stay with it. Mine is running a construction business.”
The Harris poll reveals that upper-income Americans are optimistic their fortunes will continue to grow, despite vagaries in the stock market and renewed inflationary trends. Surprisingly, 71 percent claim self-management of finances, although many seek advice from accountants and stockbrokers.
Doing as the rich do, however, isn`t easy when you don`t have the dough with which to do it. The advice they get nonetheless works well for others, albeit on a more modest scale, says a financial planner who advises the nation`s wealthiest.
MODERATE CAN PROFIT, TOO
”Much of the financial advice we give to the `upper affluent` can be used quite effectively by people with moderate incomes,” says Arthur Kinney, regional vice president of Cigna, which counsels about 3,500 customers on how to enhance wealth.
Anyone owning a VW, for instance, or just one BMW, or who doesn`t worry about malpractice suits probably couldn`t get into Kinney`s office. But virtually all can benefit from suggestions his clients get.
Among them:
— With each paycheck–before paying any bills–write a check for a predetermined amount that goes into your investment or savings. Do it first. If you pay other bills first, you`ll never have anything left over. Aim to save 20 to 25 percent of your net income this way.
— To develop assets, you must take some risks. The smartest investments are in real estate, money markets and stocks. Avoid junk bonds and commodities unless you`re prepared to lose big.
— Inquire about company savings plans at work. Some companies will match your savings with company funds, often accumulating tax-free interest. Many permit you to borrow against the account at favorable rates. ”My guess is that 50 percent of the people don`t understand what they have,” Kinney says. — Reconsider life insurance if you don`t have it. Policies have changed dramatically in the last five years. One nifty version is single-premium life insurance. Often better than an IRA, these policies provide death benefits and disability insurance. Moreover, they offer ”internal” rates of return of up to 7 to 8 percent. (”Internal” means the money, while growing inside the account, is not taxable, although it may be borrowed against at low rates). The government is likely to close this loophole in the future, but for now it`s a nice option.
— Whatever you invest in, don`t just buy and forget about it. Review it annually.
— Don`t bother subscribing to a slew of financial publications. Select just two–a magazine and a newspaper–but read both consistently. ”I recommend Money magazine, says Kinney. ”I used to buy 82 magazines and I`d never get around to reading 81 of them.”
— Figure out exactly where you spend money. Develop a good tracking system. Know where it is going. This should be No. 1 on everyone`s list, but reading it first in this sort of article is a turnoff. ”From my experience, even the affluent often don`t know where their money goes,” Kinney says.
— Stop using credit cards unless you`re in a position to pay full balances when the bill arrives. Remember that the new tax law is fast eliminating tax-deductibility of consumer interest.
— Remember the Rule of 72: Divide the number 72 by the prevailing interest rate (but leave off the decimal). The answer reveals how long it will require to double your investment at that interest rate. (Assume a 6 percent interest rate. Divide 72 by 6. The answer is 12. That`s how many years it will take to double your investment.) ”I have absolutely no idea why the Rule of 72 works, but it does,” says Kinney.
”If I were to give one message to younger people,” says Kinney, ”it`s this: If you get a good fix on where you spend money and can set aside a certain amount for investments, just by surviving you will accumulate a significant amount of assets, probably more than you ever imagined 15 years earlier.” —
