Retirement

6 Things the Wealthy Do with Their Money (That Most People Don’t)

By Chris Duderstadt

June 16, 2023

6 Things the Wealthy Do with Their Money (That Most People Don’t)

Key Points – 6 Things the Wealthy Do with Their Money (That Most People Don’t)

  • Reviewing the Four Types of Wealth
  • Breaking Down Charles Schwab’s 2023 Modern Wealth Survey
  • Do You Consider Yourself to Be Wealthy?
  • Understanding All the Components of a Comprehensive Financial Plan
  • 11 Minutes to Read | 23 Minutes to Listen

What Are Things That the Wealthy Do with Their Money?

How much do you need to feel wealthy? According to Charles Schwab’s 2023 Modern Wealth Survey, it’s $2.2 million. Does that seem like a high bar to you to be considered as wealthy? Dean Barber and Bud Kasper will share their insight on the study along with six things the wealthy do with their money on America’s Wealth Management Show.

Growing and Protecting Your Wealth

What are some of the things you focus on to grow your wealth? And when you think about a year like we had in 2022 where stocks and bonds were both hit hard, we need to look at how to protect your wealth as well. From tax-efficient investing to leveraging financial tools effectively, Dean and Bud are going to explain some of the lesser-known tactics that can make a significant impact on your financial future. The power of compounding, art of strategic philanthropy, and value of comprehensive estate planning are just a few things we’re going to look at that the wealthy do with their money.

What Is Wealth?

We’re going to dive into our full list of six things the wealthy do with their money (that most people don’t) shortly. But before we do that, we need to answer a questioned that Dean and Bud asked on America’s Wealth Management Show a few weeks ago. If you didn’t catch the episode, What Is Wealth? 4 Types of Wealth, make sure to check it out. If you did tune in, this will still be helpful to review.

The first thing that comes to a lot of people’s minds with wealth is money. That’s financial wealth, but it’s not the only type of wealth. There’s also social wealth, health wealth, and time wealth.

There’s More to Being Wealthy Than How Much Money You Have

Think about this. Let’s say that you have $2.2 million, which was the benchmark of being wealthy according to the Schwab survey that we’re going to review. Well, there were still only 48% of the people in that survey who considered themselves to be wealthy.

Having $2.2 million might not make someone feel wealthy if they’re not doing anything to enjoy their money. That’s a mixture of social wealth and time wealth that they’re not experiencing. And then if they suddenly start experiencing health issues as well, their lack of health wealth can cut away from all the other three types of wealth. Hopefully, though, you’re living a happy and healthy life so that you can really focus on growing and protecting your financial wealth.

High Wealth, High Expectations

Dean and Bud have noticed over the years that when some people reach the pinnacle of what they consider to be financially wealthy, there are certain things that they come to expect. And people who don’t feel wealthy might not even be aware of those things.

“We believe that everybody should have access to the same strategies that wealthy people expect. And that’s what we’ve built here at Modern Wealth Management. It’s the ability with a very thorough team to deliver the strategies that ultra-wealthy people expect, but that the millionaires next door don’t even know exists.” – Dean Barber

Social Security Isn’t an Entitlement Program

There’s one retirement planning misconception that Bud and Dean want to clear the air on as well. Bud got to thinking about how people put money into Social Security throughout their careers. If you knew the exact dollar amount that you contributed to Social Security, wouldn’t it be interesting to see what the income would have been off of when you start taking the benefit?

“It just dawned on me there’s a chunk of wealth there that people have been paying into, but they don’t know what that total is. They just know what the income stream would be like.” – Bud Kasper

If we think about an average couple’s combined Social Security checks, the total is somewhere between $4,000 and $5,000 a month. Sometimes it’s more than that. If you just did the 4% withdrawal rule, it would take you $1 million to get $40,000 a year, which is a little over $3,000 a month. And it’s going to take you $1.5 million to get the kind of income that Social Security delivers. That’s part of your wealth.

“It’s just one that gets overlooked because people think that it’s an entitlement program. But the truth is it’s your own money and there are many different ways that you can claim it. The wealthy people that I’ve worked with understand that it’s their money and they go to all the lengths necessary to get every dollar out of that system. They don’t fall into the trap of thinking that they put their money into it and want to get it out as soon as possible. They understand that it’s an asset and it needs to be treated like any other asset. It needs to be analyzed and scrutinized to get the most out of it possible over your lifetime and your spouse’s lifetime.” – Dean Barber

6 Things the Wealthy Do with Their Money (That Most People Don’t)

Now, let’s get to Dean and Bud’s original list of six things the wealthy do with their money (that most people don’t). We’ll quickly review the list before diving into each item in detail.

  1. Spend wisely
  2. Avoid paying unnecessary taxes
  3. Hire professionals
  4. Understand how to use leverage (debt and insurance)
  5. Understand the benefits of charitable giving
  6. Communicate their plans with their beneficiaries

1. Spend Wisely

Number one on our list of things the wealthy do with their money is spending wisely. Dean and Bud have met some of the most incredible people because of their careers. And they’re not talking about their colleagues or other financial professionals they’ve crossed paths with (not that they haven’t been incredible people). They’re talking about their clients. Dean and Bud have been thoroughly impressed by how some of their clients think about money, their spending habits that they’ve developed, how they’ve made money, and the amazing things they’ve done and accomplished.

“The number of opportunities that are available in the United States to people and what people have done to get their wealth never cease to amaze me. One of the main things that I see is they have good spending habits. They spend wisely. They think about what they want to spend money on versus what they need to spend money on. And even though they’re wealthy, they still look for the best deal.” – Dean Barber

Looking for the best bargain is something that everyone can do, no matter your wealth status. People who consider themselves to be wealthy might have a little bit more of an intuitive sense as to what that really means in terms of how to get the most out of the wealth that they’ve accumulated for themselves. And more importantly for younger people, how do you accumulate wealth so that it becomes very obvious that you have enough to retire?

What About the People That Don’t Feel Wealthy?

On the flip side, let’s talk about the people who don’t feel wealthy. Chances are that they collect a lot of stuff and have a lot of stuff that has no real value.

Yes, everyone has things that are disposable. But when the wealthy spend money, they’re wondering what the value of something is going to be five to 10 years from now. Is whatever they’re paying for going to be worth it over time?

Planning for Expected and Unexpected Expenses

Part of spending wisely that the wealthy do with their money involves planning of expected and unexpected expenses. We all know there are unexpected things that are going to happen in our lives. The wealthy tend to plan for those unexpected things by talking to their peers and financial advisors.

“Wealthy people understand the potential things that could come up that people may not expect that could disrupt their wealth. It’s no different than a pilot that has a checklist. They plan for the unexpected. The wealthy are not going to get caught making an emotional decision. They understand that fear and greed are the two most dangerous emotions when it comes to money.” – Dean Barber

Those emotions have become even more dangerous given how the markets have performed over the past year and a half.  Until Wednesday, the Federal Reserve had aggressively raised rates since March 2021. After 10 consecutive rate hikes, the Fed paused at this week’s FOMC meeting, but Jerome Powell indicated that there would be two more hikes later this year. All those hikes have certainly impacted how people spend.

“You need to be smart about it. How much exposure do you have to the market? It always changes, so you need to be active with it.” – Bud Kasper

2. Avoid Paying Unnecessary Taxes

One of the most common things that the wealthy do with their money is keep it. And by keep it, we mean that they never pay unnecessary taxes. They go to the very last degree to make sure that they’re following the letter of the law, but they’re not paying one more dollar in taxes than they absolutely need to.

“In some of the cases, wealthy people might have a couple of CPAs that are working on their assets. When you think about gross income that you have, if we can net it out to a better number with successful tax planning strategies, that’s certainly going to affect them positively.” – Bud Kasper

3. Hiring Professionals

As far as tax planning goes, if Bud could have all his money in a Roth IRA, he would. Why? Because of its tax-free growth and distributions. It’s difficult to get to that position, though. Still, Bud and Dean agree that the one of the biggest things that a good CFP® Professional who works with a CPA we can have an amazing impact on the amount of taxes that you pay over your lifetime.

Roth conversions have become increasingly popular given that tax rates are scheduled to go up on January 1, 2026, when the Tax Cuts and Jobs Act sunsets. To truly understand how tax planning can make a big difference for you, download a copy of our Tax Reduction Strategies guide below.

Things the Wealthy Do with Their Money

Tax Reduction Strategies

You Don’t Know What You Don’t Know

The wealthy are smart enough to know what they don’t know and are smart enough to hire professional help.

“We all have deficiencies in certain parts of our lives. Would I operate on myself if I needed to remove a tumor? No, I’m going to find a person that knows what they’re doing and do it that way. The same goes for what we do with seeking financial planning assistance.” – Bud Kasper

Since we’re at the halfway point on our list of six things the wealthy do with their money that others don’t, this is a good time to go a little more in depth to the Schwab study we mentioned earlier. Remember that $2.2 million was what you needed to be considered wealthy according to the survey. Here are a few more statistics from the survey that jumped out to Dean and Bud.

  • 44% of the people in the survey said they don’t have enough money to need a plan.
  • 21% % of the people in the survey said it’s too complicated to create a plan.
  • 20% of the people in the survey said they don’t have time to develop a plan.
  • 18% of the people in the survey said they haven’t had a major life event and didn’t think they needed a plan.
  • 17% of the people in the survey said it’s probably too expensive to get help with creating a plan.

Building a Comprehensive Plan with a Team of Professionals

The main takeaway for all the people in the survey and everyone reading this article—whether you have $2.2 million or not—is that you need a financial plan that is built and updated with the assistance of a team of financial professionals. At Modern Wealth, that team of professionals includes CFP® Professionals and CPAs as well as estate plan, insurance, and investment specialists.

“The people that don’t have plans—and a lot of people don’t have a plan—also don’t seek out professional help. They think they can do it on their own. The reality is that if somebody sat in my office or Bud’s office and had one of our CPAs in there and looked at what we did, they’d be blown away. There’s no way they have the capacity to do it on their own. And trust me, the amount that you pay will pale in comparison to the ultimate results that will come back to you.” – Dean Barber

4. Understand How to Use Leverage (Debt and Insurance)

Next up on our list of things that the wealthy do with their money that others don’t is understanding the use of leverage. So many people get into the mindset that they can’t have debt of any kind. Wealthy people understand that the right kind of debt can be good debt. It can help grow your wealth exponentially if used properly. They also use leverage by creating wealth for the next generations.

“A perfect example of that is Malcolm Forbes. When Malcolm Forbes was in his 70s, he bought $70 million of life Insurance. Why would somebody at his age and with his wealth buy $70 million of life insurance. First, he said that he had more money than he was ever going to spend. There was no place he could put his money that was going to give his descendants a guaranteed tax-free return like life insurance. It was purchased in a life insurance trust, so it was tax-free and estate tax-free.” – Dean Barber

So, life insurance can be a good way to leverage your wealth for the next generation.

5. Understand the Benefits of Charitable Giving

Another thing that wealthy people do with their money is giving it to charity. Many of them view giving back to the community by donating to charities as a responsibility. It’s a way for them to be responsible with their wealth. And there may be some tax benefits for being charitably inclined but. While that might be a factor, but it’s never the motivation for the wealthy.

“We’ve said a lot of things that the wealthy people do with their money that others don’t. And we’re not saying that other people don’t do some of these things. The thing is that the mindset of being wealthy shouldn’t be tied to a number. You can have the same type of habits that the wealthy people have.” – Dean Barber

6. Communicate Their Plans with Their Beneficiaries

When you start to employ those habits, you get your children and grandchildren to employ those habits. Then you start to create generational wealth. This ties into number six on our list of things that the wealthy do with their money, which is communicate their plans with their beneficiaries.

“Wealthy people have family meetings. They talk to their kids about their estate. They may not go into details about how money is managed or exactly how much money is there, but they have family meetings to discuss the responsibility of having wealth.” – Dean Barber

The Power of Family Meetings

And those family meetings don’t need to be in person. While the in-person aspect is obviously more enjoyable, family meetings to discuss estate planning can always be done virtually as well.

“It’s another reason that Zoom is such an effective way of communicating. There are clients who have children in different states, but still have family meetings that we sit in on. We generally have our client couple with us, but if not, that’s fine. They can be on Zoom and still go through an itinerary that they created for the benefit of the children to understand. Oftentimes, that clarity of what’s happening is beneficial to the overall family.” – Bud Kasper

It can sometimes be hard to convince our clients to have family meetings because they were told by their parents to not talk about money. But nothing could be further from the truth. Communication about you and your family’s needs, wants, and wishes is critical.

Remember, It All Starts with a Plan

Like we said early in the article, it’s our mission at Modern Wealth to bring to you the things that the wealthy come to expect. But first and foremost, you need a financial plan that will give you more confidence, freedom, and time leading up to and through retirement. That plan shouldn’t be based on your friend, neighbor, or family member’s plan. This is your plan that incorporates your goals for retirement.

You can start building your plan with the same industry-leading financial planning tool that our CFP® Professionals use with our clients—all at no cost or obligation. Just click the “Start Planning” button below and you’ll be on your way.

Things the Wealthy Do with Their Money

START PLANNING

While it’s critical to have a financial plan, remember what we said about why it’s pivotal to work with a team of financial professionals that’s working for you. We can give you a glimpse of what that’s like—all while answering your retirement planning questions—during a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals. You can schedule an in-person, virtual, or phone meeting by clicking here. We’re ready to help you reach your financial goals.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.