The 6 ways wealthy families money differently

There once was the golden promise - work hard, and you'll have enough. Keep your head down, hold the job, and your pension + social security will cruise you through the rest of your life.

Yet for a generation that graduated through the '08 recession, struggled to string together a down payment in increasingly expensive cities, frantically juggled the pressures of dual-career relationships and the needs raising a family through a century-definining pandemic, the message is clear: the promise is broken. What worked before will not work now. And what if we're not even playing the right game?

"I thought we were doing all the right things, but didn't even know there's a different playbook."

We're here to open the gate. We need a different playbook: and we don't even need to invent it, we just need to share it. Wealthy families think about money and act on financial decisions entirely differently from how things are taught and culturally reinforced for everyday families. From investing, to kids, to taxes, to debt... the principles are different from what is so often reinforced when you come from a family or community that doesn't have as much.

In today's blog post, we're going to talk about the key ways wealthy families money differently:

• The future's worth the sacrifice

• How risk is their friend

• How to invest smarter (and not just work harder)

• Why the wealthy love debt

• How tax planning is like coupon-stacking

• How kids are an asset… financially speaking

• What the wealthy teach kids from the age of 5

The future's worth the sacrifice

The wealthy actively think about and value their futures... even if it means near term 'sacrifices' like spending some extra time, or not spending today to have more tomorrow.

When you've grown up and are used to modes of financial scarcity, it can become normalized to focus on the week to week. That often means you spend less time thinking optimistically about the future, which creates a self-fulfilling prophecy: if you value the future less, you're less likely to do something good for future you at the expense of present you. 

To build real wealth, investing and compounding requires that you consistently value the future. If not, you're more likely to spend the money instead of put it aside or invest it. 

Valuing the future also comes into effect when the wealthy plan .... that could happen around having children, opening trusts/estates, or buying additional insurance. They're more likely to think about each of these events as opportunities to prepare for and financially optimize (usually with with a view to reduce taxes). 

How risk is their friend

We're taught to "be careful" from a young age... but this well-intentioned offhand comment can often reinforce a philosophy that risk is a bad thing.

To invest well, calculated risk is a good thing and is the foundation of being able to build wealth. Investing in the stock market? There's risk - the market could go up or down. Leaving your money in a checking account earning nearly 0%? There's still risk - the bank could have business issues. Move to a new city - there's technically risk even for that... there could be a climate event that only hits the city.

'Risk' is this imperfect large paintbrush used to describe if there's an opportunity for a negative outcome, but often doesn't capture the reality that almost everything in life has some form of 'risk' when looked deeply enough.

Just because there's risk, doesn't mean it should be avoided.

In the financial world and in wealthier circles, you learn that early on: all the many different types of risks and the reality that earning more requires taking on more risk. The problem happens when you're not in those circles - hearing the term "risk" is understandably offputting. And when it becomes so offputting that you take the "safe" path like leaving your money in a checking / savings account, then you might think you're doing the safe thing without realizing it's hurting your future.

How to invest smarter (and not just work harder)

The "low-cost-invest-in-the-market" movement began in the 1970's after the creation of affordable ETFs (ie. exchange traded funds / portfolios created for you). The Boglehead movement popularized and simplified investing to create an "all-you-need-to-do-is-this-one-thing".... but what if that's not even the game that wealthier individuals play? 

While investing in the market is an important building block in an investment portfolio... Bank of America's head of investments for their private banking division recently shared that younger wealthy investors have 33% of their wealth in alternative investments ..... and that scales up to almost 50% for ultra high net worth families according to Motley Fool.

These 'alternative investments' can include real estate, hedge funds, private equity funds, startup investments and more. Returns can be as high as 3x the average of a stock/bond portfolio for top performing alternatives.

Alternative investments have higher risk and often, higher returns and are best suited for longer investment time frames (for example, money put aside for retirement). And as here's rising awareness about their existence, access is increasingly growing.

Why the wealthy love debt

We've all heard it: avoid debt at all costs. Pay off your debt as quickly as possible. But that overly simplistic summary of 'debt' may be missing a reality that : debt, when used carefully, can be good for building wealth.

Credit card debt, high interest debt (ie, 8%+), debt created from spending.... all of these are examples of bad debt. But debt used to enable an investment, can help you make the most of the money you have.

The most common example of good debt is a house mortgage... a mortgage enables you to buy a house earlier than if you had to save up the full house price. With a 20% down payment, you can borrow 80% of the value of the house.  When your house grows in value, you've only had to pay the down payment upfront to still get the full benefit of your house investment increasing. That's called leverage.

Wealthy families use leverage regularly to make their money go further. Let's say they want to buy a new house... even if they had the money to buy it outright, perhaps they can get a low interest rate loan at 4%. They take the loan and take the other money they have and invest it for 10%. Then, they can earn an additional 6% instead of just paying off the house. Essentially, you're using someone else's money (like the bank) to put more money to work. 

Even better? Taking out loans that go towards investments can often create tax benefits like deductions to reduce the amount of taxes you'll have to pay. That's one of the key reasons why the wealthiest families often pay such low amounts of income taxes.

How tax planning is like coupon-stacking

If you started your tax-paying years logging into Turbotax, it's easy for it to feel like there's not much you can do about the taxes this black-box-software tells you to pay or how much you might get in a refund. 

And while there are checklist like items like deductions, to see what you qualify for, the tax act has a number of areas where there are opportunities to plan ahead and potentially lower your taxes and those don't live in a checklist.

Often, it's like stacking coupons and reading the fine print to create a combination with the biggest benefit. The foundations of tax planning are often focused on:

• Creating tax deductions: if we take a loan out for the rental property, the interest is deductible. 

• Planning when income is created: if we have an investment we want to sell, perhaps we wait until we have a year with lower combined income (like if we take parental leave)

• Estate planning: reducing the amount of taxes your loved ones have to pay

• Creating a corporation for your side hustle: to better control when income is taken & to ensure expenses are deducted (ie. your phone bill, supplies, etc.)

How kids are an asset… financially speaking

You'll often notice a trend for families who run their own companies: their kids are involved in one way or another... potentially as child marketing models, in the office as assistants, or as social media managers. If you dive into the tax side of things, hiring your kids is often a great way to 'pay' them income (and potentially reduce your income taxes).

Say you earned $250k from your company .... in California, your marginal tax rate would be nearly 50%. Let's say you hired your child as a model for a marketing role... if you paid them ~$14k, that would be below the income tax threshold and there would be no taxes on that. 

Since you run the company, you could pay yourself $236k then pay your kid $14k. You would save almost $7k in taxes and your child wouldn't have to pay any taxes. Even better? You could even now put some of that towards a roth IRA and get your kid started on retiring early (and pass on the tax benefits).

The key takeaways...

The wealthy often build wealth with a different playbook than the one everyday households are told to follow: the world of finance has more shades of grey than hard and fast rules. Understanding the ways the wealthy use the areas of grey when investing, planning taxes, or using debt can unlock ways to grow wealth smarter (instead of the path of just working harder).

Sources

Lamothe, Cindy. "8 Ways the Rich Invest Their Money Differently." Yahoo Finance, 6 Dec. 2023, www.finance.yahoo.com/news/8-ways-rich-invest-money-130024491.html.

"9 Money Habits of Multimillionaires." Motley Fool Wealth Management, 10 Jan. 2024, www.foolwealth.com/insights/9-money-habits-of-multimillionaires.

Coxwell, Kathleen. "How the Wealthy Spend Money Differently from Everyone Else." Boldin, 25 Apr. 2024, www.boldin.com/retirement/how-the-wealthy-spend-money-differently-from-everyone-else/.

"Take the money now or later? Financial scarcity doesn’t lead to poor decision making." American Psychological Association, 14 Sept. 2023, www.apa.org/news/press/releases/2023/09/financial-scarcity-decision-making.

Konish, Lorie. "Young Wealthy Investors Are Turning to Alternative Investments." CNBC, 5 July 2024, www.cnbc.com/2024/07/05/young-wealthy-investors-are-turning-to-alternative-investments.html.

Hazeley, Carl. "What Is Alternative Investing?" Finimize, www.finimize.com/content/alternative-investing.

Caporal, Jack. "High-Net-Worth Individuals and Alternative Investments." The Motley Fool, 2 Oct. 2023, www.fool.com/research/high-net-worth-alternative-investments/.

Swanick, Stephen. "Hiring Family: How To Hire Your Kids and Legally Pay Them." ERC Today, 15 Dec. 2023, www.erctoday.com/how-to-hire-your-kids/.

Jones, Keith. "Hiring Your Kids: What You Need to Know." Keith Jones, 2024, www.keithjones.cpa/hire-your-kids/.

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