Have you ever wondered how some people can be millionaires while earning a modest income? Contrary to popular belief, high net worth does not always go hand in hand with high income. In fact, there is a fascinating subset of people who have accumulated high total assets, but maintain a relatively low annual income. These are the low-income, high net worth individuals who have mastered the art of wealth building and preservation.
In this article, we will explore the intriguing world of high net worth, low income individuals, breaking down the paradox of their financial situation and offering guidance for individuals who aspire to build wealth in a similar manner. We will also discuss some key financial management strategies for those who find themselves in this unique group.
Who are Low-Income, High Net Worth Individuals?
Before we dive into the details, let’s define some key terms:
- Net worth is the difference between your total assets and your total liabilities. Assets include anything you own that has value, such as cash, investments, real estate, collectibles, etc. Liabilities include anything you owe, such as mortgages, credit card debt, student loans, etc.
- High net worth individuals (HNWI) are those who have investable assets exceeding $1 million, excluding their primary residence. According to Investopedia, the United States had a record number of high-net-worth individuals at 7.46 million people as of 2021.
- Ultra-high net worth individuals (UHNWI) are those who have a net worth of more than $30 million.
- Income refers to annual earnings derived from work, investments, and other sources. Income is subject to taxes and may vary from year to year depending on economic conditions and personal circumstances.
- Low income earners typically fall below the median household income for their area. According to the U.S. Census Bureau, the median household income in the U.S. was $67,521 in 2020.
So, who are low-income, high net worth individuals? They are people who have over $1 million in investable assets, but earn below the median income for their area. They may have inherited their wealth, or built it over time through strategic investing and financial planning. They may also have chosen to live below their means and prioritize saving and investing over spending.
The Paradox of High Net Worth with Low Income
How is it possible to be wealthy and poor at the same time? The answer lies in the difference between wealth and income.
Wealth is a measure of accumulated assets over time. It reflects your financial history and your ability to save and invest. Wealth can grow through compounding returns and appreciation of assets. Wealth can also be passed down from generation to generation.
Income is a measure of current earnings in a given period. It reflects your financial present and your ability to earn and spend. Income can fluctuate depending on economic conditions and personal circumstances. Income can also be affected by taxes and expenses.
Therefore, it is possible to have high wealth and low income if you have a large amount of assets that generate little or no taxable income, or if you have a low-paying job or no job at all. Conversely, it is possible to have low wealth and high income if you have a high-paying job but spend most or all of your earnings, or if you have a lot of debt that reduces your net worth.
The paradox of high net worth with low income is not uncommon in the U.S. According to Pew Research Center, median net worth in 2010 was 7% higher than in 1983, but median income was only 2% higher in the same period. This suggests that wealth has grown faster than income for most Americans.
However, not all Americans have benefited equally from the growth in wealth. The same report shows that economic inequality has widened over time, as upper-income families have accumulated more wealth than lower- and middle-income families.
How to Achieve High Net Worth with Low Income
To join the ranks of low-income, high net worth individuals, you need to build wealth rather than earn income. This means using your income wisely to save and invest for the long term. Here are some key strategies:
Building Wealth: It’s Not About High Income
Building wealth is not about having a high income. Many high earners spend more than they earn and have little or no wealth. Many low earners save and invest the difference and have a high net worth.
The key is to have a positive cash flow, which means your income exceeds your expenses. The bigger the gap, the more you can save and invest. The more you save and invest, the more your wealth grows.
Investing and Asset Building
You need to invest your money in assets that generate income and appreciate in value. Assets are things that put money in your pocket, such as stocks, bonds, mutual funds, real estate, etc. Assets can provide you with passive income, which is income that you earn without working for it. Passive income can supplement or replace your active income.
The opposite of assets are liabilities, which are things that take money out of your pocket, such as mortgages, credit card debt, car loans, etc. Liabilities can reduce your cash flow and your net worth. The more liabilities you have, the harder it is to build wealth.
The goal is to increase your assets and decrease your liabilities over time. This will increase your net worth and your passive income. The more passive income you have, the less dependent you are on your active income. This gives you more financial freedom and security.
Real Estate and Investing
Real estate is one of the most popular and profitable ways to invest and build wealth. Real estate can provide you with both income and appreciation. Income comes from renting out your property to tenants who pay you rent every month. Appreciation comes from selling your property at a higher price than what you bought it for.
Real estate can also provide you with tax benefits, such as depreciation, which allows you to deduct a portion of the cost of your property from your taxable income every year. This reduces your tax liability and increases your cash flow.
However, real estate is not without risks and challenges. You need to have enough money for the down payment and closing costs, as well as for maintenance and repairs. You also need to deal with tenants, vacancies, property management, legal issues, etc. Real estate is not a passive investment; it requires time, money, and effort.
The stock market is another popular and profitable way to invest and build wealth. The stock market allows you to buy shares of companies that produce goods and services that people want and need. By owning shares of these companies, you become a part-owner of their businesses and share in their profits.
The stock market can provide you with both income and appreciation. Income comes from dividends, which are payments that companies make to their shareholders from their earnings. Appreciation comes from selling your shares at a higher price than what you bought them for.
The stock market can also provide you with diversification, which means that you can invest in different sectors, industries, countries, etc., to reduce your risk and increase your returns. The stock market is also highly liquid, which means that you can buy and sell shares quickly and easily.
However, the stock market is also volatile and unpredictable. You need to have enough knowledge, skills, and discipline to analyze companies, pick stocks, time the market, etc. You also need to have enough patience and tolerance for risk to withstand market fluctuations and downturns. The stock market is not a get-rich-quick scheme; it requires research, strategy, and perseverance.
Retirement Savings and Financial Planning
You need to save for retirement and plan for your financial future. Retirement savings are money that you set aside for your golden years when you stop working or reduce your work hours. Retirement savings can provide you with a steady source of income that can cover your living expenses and allow you to enjoy life after work.
One of the best ways to save for retirement is to use tax-advantaged accounts like 401(k)s and IRAs (Individual Retirement Accounts). These accounts allow you to save money before taxes or after taxes (depending on the type of account), which reduces your taxable income and increases your savings rate. These accounts also allow your money to grow tax-free or tax-deferred (depending on the type of account), which increases your compound returns over time.
However, retirement savings are not enough by themselves; you also need a financial plan that outlines your goals, strategies, risks, etc., for achieving financial success in the short term and the long term. A financial plan can help you budget your income and expenses, allocate your assets among different investments, optimize your taxes, protect yourself from unforeseen events (such as illness or injury), plan for major life events (such as marriage or children), etc.
A financial plan can also help you track your progress toward your goals and adjust your strategies as needed. A financial plan is not a one-time thing; it is a dynamic and ongoing process that requires regular review and revision.
Reducing Debt and Liabilities
You need to reduce your debt and liabilities as much as possible. Debt and liabilities are money that you owe to others, such as lenders, creditors, service providers, etc. Debt and liabilities can drain your cash flow and your net worth. The more debt and liabilities you have, the harder it is to save and invest.
The goal is to pay off your debt and liabilities as soon as possible, starting with the ones that have the highest interest rates and fees. These include credit card debt, payday loans, car loans, etc. These types of debt can quickly accumulate and become unmanageable if you only pay the minimum amount or miss payments.
Once you pay off your high-interest debt, you can focus on paying off your low-interest debt, such as mortgages, student loans, etc. These types of debt can also be refinanced or consolidated to lower your interest rate and monthly payment. This can free up some cash flow that you can use to save and invest.
However, not all debt is bad; some debt can be used to leverage your assets and increase your returns. For example, using a mortgage to buy a property that generates rental income and appreciation can be a smart move, as long as you can afford the monthly payment and maintain the property. Similarly, using a student loan to get a degree that increases your earning potential can be a wise investment, as long as you choose a field that has high demand and low supply.
The key is to use debt wisely and sparingly, and to avoid unnecessary or frivolous debt that does not add value to your life or your wealth.
Six Wealth Management Strategies for High Net Worth, Low-Income Individuals
If you are already a low-income, high net worth individual, or if you are on your way to becoming one, you need to adopt some wealth management strategies that can help you preserve and grow your wealth while living on a low or fixed income. Here are some tips:
Managing Cash Flow
Cash flow is the difference between your income and expenses in a given period. Cash flow determines how much money you have available to save, invest, spend, or give.
For low-income earners, managing cash flow can be challenging because their income may not be enough to cover their expenses or may vary from month to month. Therefore, they need to be careful with their spending and budgeting habits, and avoid unnecessary or impulsive purchases.
They also need to have multiple sources of income, such as passive income from investments or side hustles from freelance work or online businesses. These sources of income can supplement their main income and provide them with more financial stability and flexibility.
Additionally, they need to have an emergency fund that can cover at least three to six months of living expenses in case of unexpected events such as job loss, medical emergency, car repair, etc. An emergency fund can prevent them from having to dip into their savings or investments or incur more debt in times of crisis.
Capital Gains and Investment Returns
Capital gains are profits that result from selling an asset at a higher price than what it was bought for. Investment returns are earnings that result from holding an asset that pays dividends or interest.
Capital gains and investment returns are important sources of wealth for low-income earners because they are not subject to payroll taxes (such as social security or medicare taxes) like regular income. They are also taxed at lower rates than regular income (depending on the type of asset and the holding period).
However, capital gains and investment returns are not guaranteed; they depend on market conditions and performance of individual assets. Therefore, low-income earners need to diversify their portfolio among different asset classes (such as stocks, bonds, real estate, etc.), sectors (such as technology, health care, energy, etc.), industries (such as e-commerce, biotechnology, renewable energy, etc.), countries (such as U.S., China, India, etc.), etc., to reduce their risk and increase their returns.
They also need to rebalance their portfolio periodically (such as annually or quarterly) to maintain their desired asset allocation and risk level. Rebalancing involves selling some assets that have increased in value and buying some assets that have decreased in value. This can help them lock in some profits and take advantage of market opportunities.
Furthermore, they need to preserve their wealth by avoiding taxable events that trigger capital gains taxes. These include selling assets within a year of buying them (short-term capital gains), selling assets that have appreciated significantly (large capital gains), or withdrawing money from tax-deferred accounts before retirement age (early withdrawal penalty). These events can reduce their net worth and their cash flow.
Instead, they should hold their assets for at least a year (long-term capital gains), use tax-loss harvesting to offset their capital gains with capital losses (selling assets that have declined in value), or withdraw money from tax-free accounts (such as Roth IRA) or tax-efficient accounts (such as municipal bonds) when they need cash. These strategies can help them minimize their tax liability and maximize their cash flow.
Tax Optimization
Taxes are unavoidable and can take a big bite out of your income and wealth. Therefore, low-income earners need to use various tax strategies to reduce their taxable income and the amount of taxes they pay.
Some of these strategies include:
- Taking advantage of tax deductions and credits that can lower your taxable income or directly reduce your tax bill. These include deductions for mortgage interest, property taxes, charitable donations, medical expenses, etc., and credits for child care, education, retirement savings, etc.
- Contributing to tax-advantaged accounts that can defer or eliminate taxes on your savings and investments. These include 401(k)s, IRAs, HSAs, 529 plans, etc.
- Choosing tax-efficient investments that can generate income that is exempt or taxed at lower rates than regular income. These include municipal bonds, qualified dividends, long-term capital gains, etc.
- Planning your income and expenses strategically to avoid moving into a higher tax bracket or triggering additional taxes. This may involve timing your income and expenses to coincide with lower-tax years or periods, such as retirement, unemployment, etc.
- Seeking professional tax advice from a certified public accountant (CPA) or a tax attorney who can help you navigate the complex and ever-changing tax laws and regulations.
Financial Institutions and Wealth Management
Financial institutions are organizations that provide financial products and services to individuals and businesses. Wealth management is a professional service that offers financial planning and investment advice to high net worth individuals.
Some of the financial institutions and wealth management services that can help you build and preserve your wealth include:
- Banks and credit unions that offer checking and savings accounts, certificates of deposit (CDs), money market accounts, etc., that can store your money safely and earn some interest.
- Brokerage firms that offer investment accounts, such as mutual funds, exchange-traded funds (ETFs), stocks, bonds, etc., that can grow your money through compounding returns.
- Robo-advisors that offer automated investment platforms that use algorithms to create and manage your portfolio based on your risk profile and goals.
- Financial advisors that offer personalized financial planning and investment advice that can help you achieve your financial goals.
- Estate planners that offer legal services that can help you plan for the distribution of your assets after your death.
The Role of Financial Experts
Financial experts are professionals who have the education, experience, and credentials to offer financial advice or services to individuals or businesses.
Some of the financial experts that can help you manage your wealth include:
- Certified Financial Planner (CFP) who can help you create a comprehensive financial plan that covers your income, expenses, savings, investments, taxes, insurance, retirement, estate planning, etc.
- Certified Public Accountant (CPA) who can help you prepare and file your taxes, as well as provide you with tax advice and strategies.
- Enrolled Agent (EA) who can represent you before the Internal Revenue Service (IRS) in case of an audit or a dispute.
- Certified Fraud Examiner (CFE) who can help you detect and prevent fraud or identity theft.
- Certified Estate Planner (CEP) who can help you plan for the transfer of your assets to your heirs or beneficiaries.
Keeping Track of Your Wealth
Maintaining a thorough understanding of your wealth involves diligent observation of various financial components, including your income, expenses, assets and liabilities, net worth and cash flow, as well as portfolio performance and allocation.
Consistently monitoring these elements assists you in various ways. It helps you maintain clear awareness of your financial circumstances, evaluate the progress made towards your goals, identify any arising issues or opportunities, make choices based on sound information, and adjust your strategies when necessary.
Numerous tools and methods are available to simplify this task. Spreadsheets, for instance, are versatile tools for recording and analyzing your financial data. On the other hand, budgeting apps offer a straightforward and efficient approach to keep track of income and expenses. For a quick and convenient estimate of your net worth, you can turn to net worth calculators. Additionally, portfolio trackers provide an organized way to keep an eye on your investments.
A comprehensive tool such as Kubera takes this even further, offering a complete overview of your financial situation by consolidating all your financial accounts in one location. Kubera provides leading portfolio tracking and net worth calculator features, and even facilitates wealth preservation and management planning with its fast forward feature. Furthermore, Kubera allows you to connect and share data with your Certified Financial Planner (CFP), simplifying the process of wealth management.
Planning Your Financial Future with Kubera
Whether you’re already a low-income, high net worth individual, or you aspire to become one, Kubera can help you protect your financial health and help you achieve your financial goals. Kubera is more than just a net worth tracker; it is a comprehensive wealth management platform that allows you to:
- Connect all your financial accounts, such as bank accounts, investment accounts, retirement accounts, etc., and see your net worth and cash flow at a glance
- Track your assets across different categories, such as cash, stocks, bonds, real estate, collectibles, etc., and see their performance and allocation
- Plan for your retirement and other financial goals, such as buying a home, paying off debt, saving for college, fund contributions, distributions etc., and see how much you need to save and invest
- Plan to optimize your taxes and reduce your tax liability
- Share your financial data with your trusted contacts, such as family members, friends, or financial advisors, who can access your information in case of an emergency or upon your death
To get started on your journey to financial success, sign up for a trial with Kubera for just $1. You’ll get access to all the features and benefits of Kubera for 30 days. After that, you can choose from one of the affordable plans that suit your needs and budget.
Don’t let your income limit your wealth potential. With Kubera, you can achieve high net worth with low income and enjoy financial freedom and security. Join Kubera today and take control of your financial future.
