Today, in 2022, the top-earning households in the United States have yearly incomes of almost $600,000 dollars or more! And, to be considered in the top 1% of households in Connecticut, families need to earn almost $900,000 a year! That’s earning almost a million dollars every year! Crazy!
So, how do these mysterious 1% families get so rich? Getting a good job with a high salary is just part of it. Well, it’s a pretty big part of it. But, another huge difference that separates the 1% from the rest of us is how they manage their money once they make it.
It’s absolutely crazy to me that most kids are never taught about personal finance in school because it really is what separates the rich from the poor. Luckily, it seems like more and more school systems are incorporating personal finance into their curriculums nowadays since the pandemic taught us all how important it is to have a financial safety net.
Florida, Nebraska, Ohio, and Rhode Island have all recently passed laws requiring personal finance classes for high school graduation. But, still, those are the only other states in the country that require personal finance classes. And that explains why so many people in our country don’t know how to manage their finances correctly.
Well, lucky for you, I’m going to give you a crash course on finances in this article and teach you how to manage your money like the 1%. And, hopefully, you can start saving money, staying out of debt, and preparing for a wealthy and stress-free future.
This is how to manage your money the 1%.
#1: Track Expenses and Budget
One thing that the 1% understand better than the rest of us is the value of $1. They know that, if they can reduce their spending by $1 or $1,000, they can then put that money into a stable investment and watch it grow into a whole lot more over the years. But, let’s not get ahead of ourselves yet.
First of all, if you want to manage your money like the 1%, you’ve got to learn how to budget. And that starts with tracking your expenses. Every time that you spend money throughout the course of a month, you should be recording it somewhere.
Some people choose to create a personal expense spreadsheet using Microsoft Excel, others choose to write all their stuff down in a notebook, and there are also some great apps out there that can help you budget your money effectively. Try out the app YNAB (which stands for “You Need A Budget”).
With this app, you can input every expense that you have, whether it’s your cell phone bill, what you spend at the grocery store, gas money, rent, or dining out with friends. YNAB will take all of these and categorize them so you can see how much you spent each month on each category.
You can do basically the same thing with Excel and, personally, I like to use Excel because there are a lot of great ways to track your expense over time and see what percentage of your income is going to a certain category. There are some great Excel templates online that can make all that super easy for you. Smartsheet.com is a great place to look for these.
Anyway, whatever method you use, you should be analyzing your expenses after a month or two. How much am I spending on gas? How much am I spending on groceries? How much on streaming subscriptions? Et cetera.
Then, you should start looking for places where you can reduce those numbers. After you’ve trimmed the fat from your spending, you can create your budget. For example, $1,000 to rent, $200 to gas, $300 to groceries, $50 to your cell phone plan, and so on.
Then, you do everything you possibly can to stick to that budget every month so that you can start putting the excess money into your savings.
#2: Pay Down High-Interest Debt
Another major theme among the 1% is that they don’t carry high-interest debt. And, when they do have high-interest debt, they pay it off before they do anything else with their money. The biggest thing here is credit card debt.
According to Business Insider, the average interest rate for credit cards in the first quarter of 2022 was 16.7%. Compare that, for instance, to the average mortgage rate in July 2022, which was a little over 5%. As you can see, credit cards carry super-high interest rates.
So, if you have a large credit balance that you haven’t paid off, that balance is growing fast, which means you’re going to owe a whole lot more money the longer you let it sit there. Before you contribute any money to savings or investments, all of the excess income that you earn in a month should go directly to paying that down.
The same goes for any other high-interest-bearing debt. Pay off your student loans before you start saving and pay off your car too.
A lot of people like to use what’s called “the avalanche method” and this involves listing out all of your debts from the ones with the highest interest rates to the ones with the lowest interest rates. Then, you prioritize paying off the one with the highest interest. Then, once that debt is completely paid off, you move on to the next highest, and so on.
Then, once you’re debt-free, you can start worrying about contributing to your savings and making investments.
#3: Build an Emergency Fund
The 1% understands that life throws curveballs at you. And, by “curveballs,” I mean massive financial obligations that you could have never seen coming. For instance, maybe you have a family member that doesn’t have medical insurance and, suddenly, you need to pay for their operation. Or your car breaks down and you need to buy a new car to get to work. Or you lose your job and suddenly you have no income but you still need to pay rent.
The 1% understands that you need to have money set aside to weather these kinds of unexpected expenses. And that means setting up an emergency fund. This is a dedicated account where you should be putting away around three to six months of expenses.
So, go back to your budget from the first section of this article and multiply your monthly expenses by three to get the very minimum that you should shoot to have in your emergency fund. Let’s say that your monthly expenses are $4,000. That means that you should have at least $12,000 in your emergency fund before you start saving your money in other places. Ideally, you’d even want to have $24,000 to be extra safe.
Now, I know that sounds like a ton of money. But, if you can contribute just a couple hundred dollars every month, then you should be able to reach that goal fairly soon. And, seriously, make sure you put your money into an emergency fund before anything else!
Don’t go buying stocks with your extra cash because those stocks aren’t going to save you if you have an emergency.
#4: Save for Retirement
Everybody wants to retire at some point in their life. Kick back, relax on a beach or in the mountains, and do the things they never had time to do when they were working. Maybe you think you could’ve been the next Stephen King and all you want to do is write novels.
If you want to get to the point where you can retire, you need to have a savings plan. And, the earlier you start, the better. The very best way to accumulate retirement savings fast is through an employer-matched 401(k). Essentially, the way this works is that you contribute a portion of your salary with your company to your 401(k), which is your retirement savings account. And, then, your employer will match the amount that you contribute, either 100% or some portion.
For example, if your employer offers a 100% match and you contribute $1,500 per year to your 401(k), they will also contribute another $1,500. That’s basically free money! Some employers will only match your contributions 50%, though, which means that they’d put in $750 if you put in $1,500. But, still, free money!
Now, there is a limit to how much you can contribute to your 401(k). And, this year, in 2022, that limit is $20,500. However, your employer’s matching doesn’t count toward that limit. So, potentially, if you have a 100% matching plan with your employer and you’re able to contribute $20,500 of your salary to your 401(k), you could potentially end up with $41,000 in your 401(k) at the end of one single year.
But, unfortunately, not all of us have a 100% 401(k) matching plan with an employer. Some people are self-employed (like me, for instance). Well, self-employed people can still start saving through an individual retirement account or an IRA.
I’d recommend a Roth IRA for younger people. And that’s because a Roth IRA allows you to pay tax on your contributions now instead of when you withdraw the money. This is nice because most young people will probably be in a higher tax bracket when they’re 60 and ready to retire than they are when they’re young, which means you end up paying less taxes in total.
If that was a bit confusing, just understand that a Roth IRA is the best place to save for retirement if you don’t have a 401(k). IRAs also have a contribution limit of $6,000 per year. If you don’t have a 401(k), you should definitely get a Roth IRA and contribute as much as you possibly can to it every year.
If you have a 401(k) and you want to increase your contribution limit to your retirement savings, you can have both a 401(k) and a Roth IRA and, effectively, contribute up to $26,500 per year towards your retirement.
Once you’ve got your money in your 401(k) or Roth IRA, you want to make sure that your money is being put into long-term stable investments like large index funds with good performance histories. I’d recommend going with S&P 500 index funds, which are basically funds that track the performance of the 500 largest companies in the U.S. economy. Some of the best S&P 500 index funds are offered by iShares, SPDR, and Vanguard. So, check those ones out first.
If you want to leave the investing up to other people, many companies that offer Roth IRAs will also have automated retirement investing. You just tell them how old you are, what your income is, when you plan to retire, and then they’ll build you a portfolio that will help you reach your goals. This is a good option for those who don’t want to spend their time researching the stock market.
#5: Invest Long-Term
So, you have adequate retirement savings but you still have extra money because you’re a baller and making a huge salary. What do you do with it? Well, if you want to manage your money like the 1%, you open a brokerage account and keep investing. And what do you invest in? Those same index funds that I mentioned in the previous section of this article.
Even if you can’t invest any more money in them through a 401(k) or Roth IRA, you should keep on buying into S&P 500 index funds. Don’t take it from me, take it from the Oracle of Omaha, Warren Buffet, who said in 2017: “Consistently buy an S&P 500 low-cost index fund. Keep buying it through thick and thin, especially through thin.”
Doing this might not make you as rich as Warren Buffet, but it is the best way to generate long-term returns. And it doesn’t require much effort. Poor people trade short-term and try to get ahead of the market. Poor people day trade. News flash: most people who day trade end up losing money.
The 1% knows what the proven formula for wealth generation is and they stick to it. Put your money into long-term stable investments like S&P 500 index funds, blue-chip stocks, precious metals, and other investments that have multi-decade histories of going up in value.
Then, once you put your money into these kinds of investments, leave it there! Don’t get freaked out because the market isn’t doing well and then pull all your money out. In fact, buy more of those investments if you can because they’ll be at a discount.
That’s what Warren Buffet meant when he said “especially through thin.” Keep putting your excess earnings into these stable investments and let them sit in your brokerage account for 20, 30, or 40 years. That’s going to allow them to grow substantially and reap the benefit of compound interest.
Let’s do an example to show just how powerful this investment method is. Let’s say that you have just $1,000 in an S&P 500 index fund right now. The S&P 500 has had an annualized average return of 10.5% since it was started in 1957 and we can expect that to continue into the future, if not perform even better.
Then, every month for the next 30 years, you invest $300 more into that same S&P 500 index fund. That $1,000 will have turned into nearly $775,000 dollars over the span of that 30 years and that’s due to the power of compound interest and the consistent returns of the S&P.
And that’s a modest estimate because, as your salary goes up as you get older, you’ll probably be able to contribute much more than $300 a month. That’s how you invest like the 1%.
So, forget about all the popular stocks you hear about on Reddit or playing around with crypto or day trading. Go with the tried-and-true method and you’ll end up with a nice chunk of wealth by the time you’re in your 40s.