Here is the secret to making money like the rich.
Capital gains matter more than you may realize. Income sources for those making millions of dollars a year are much different from that of the rest of the American population. According to information taken from the latest tax returns filed with the IRS, salaries and wages make up about half (46%) of the income earned for those making $1 million to $1.5 million. However, salaries and wages make up 83% of the total income for those making $30,000 to $40,000. Here's a closer look at where the rich get their money.
Main income sources
As you might expect, the rich get a larger share of their income from investments than the poor do. In fact, the top 5% of earners get over two-thirds of their income from investments. The rich also have more sources of income. Here are some of the main sources of gross income for Americans:
- Salary and wages: W-2 income from your job
- Investment income: From interest, dividends, and capital gains
- Self-employment income: Payments you receive from selling products or services
- Pensions and annuities: Payments from qualified retirement plans
- Business income: Payments from owning a stake in a private company
- Social Security income: Retirement benefits from the federal government
The top 1% make $500,000 or more
The real median household income was $70,784 in 2021, according to the U.S. Census. However, there is a wide disparity in income. According to the latest available tax returns, the bottom 50% of Americans made less than $40,000, and the top 5% of Americans made over $200,000. There were 157,197,473 tax returns filed for 2021. Here's a breakdown of the adjusted gross income (AGI) levels represented:
- Bottom third: $25,000 or less
- Middle third: $25,000 to $75,000
- Top third: $75,000 and above
- Top 5%: $200,000 or more
- Top 1%: $500,000 or more
Income sources by income level
Capital gains make up a larger share of your income the higher you are on the income ladder. Capital gains is the profit you make from selling an investment or property. Here is the percentage that a source of income accounts for at that income level:
- Bottom third: $25,000 or less
- Salary and wages: 79%
- Investment income: 4%
- Self-employment income: 10%
- Pensions and annuities: 14%
- Business income: 0%
- Social Security income: 50%
- Middle third: $25,000 to $75,000
- Salary and wages: 81%
- Investment income: 2%
- Self-employment income: 3%
- Pensions and annuities: 10%
- Business income: 0%
- Social Security income: 9%
- Top third: $75,000 and above
- Salary and wages: 48%
- Investment income: 27%
- Self-employment income: 2%
- Pensions and annuities: 6%
- Business income: 16%
- Social Security income: 2%
- Top 5%: $200,000 or more
- Salary and wages: 41%
- Investment income: 34%
- Self-employment income: 2%
- Pensions and annuities: 4%
- Business income: 20%
- Social Security income: 1%
- Top 1%: $500,000 or more
- Salary and wages: 37%
- Investment income: 37%
- Self-employment income: 2%
- Pensions and annuities: 3%
- Business income: 22%
- Social Security income: 0%
The top 5% make more money from their investments and business interests than their salary and wages. The bottom third heavily rely on Social Security and their salary and wages. The rich also make money from their private business investments. For those making $10 million or more a year, their salary only makes up 17% of their income and their investment income makes up 67%.
How to make money like the rich
The stock market is one of the primary sources of income for the rich. Many wealthy individuals invest in stocks and bonds as a way to generate passive income. According to one of the largest studies of millionaires ever conducted, millionaires did not build a net worth of a million dollars or more through inheritance. Only 2% of millionaires said they came from an upper-income family. It took hard work, discipline, and investing regularly to reach millionaire status.
According to the survey, eight out of 10 millionaires invested in their company's 401(k) plan. In addition to taking advantage of their workplace retirement plan, three out of four of those surveyed also invested in an IRA and separate brokerage account. These simple steps were some of the primary keys to their financial success.
Becoming a millionaire doesn't happen overnight. Only 5% attained that feat in less than 10 years. It took the vast majority 28 years to become one, and the average age they hit that milestone was 49. Plus, eight out of 10 millionaires did not receive a dime in inheritance. Only 31% averaged more than $100,000 in salary earnings, and one-third didn't make six figures in any working year at all. You don't have to come from a rich family or make lots of money to become a millionaire. The millionaires in the study focused on their own education, stayed out of debt, and watched their spending. By spending less than they earned, they were able to invest and build the foundation of their wealth.
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I bring a wealth of knowledge and expertise to the topic of wealth accumulation, specifically focusing on income sources, capital gains, and investment strategies that align with the practices of the affluent. My insights are grounded in a comprehensive understanding of financial data, tax returns, and economic trends. Let's delve into the key concepts presented in the article to shed light on the secret to making money like the rich.
1. Income Sources:
- The article highlights the disparity in income sources between different income brackets. For those earning $1 million to $1.5 million, salaries and wages contribute only 46% of their income, while the figure rises to 83% for those earning $30,000 to $40,000.
- The primary income sources for Americans include salary and wages, investment income (interest, dividends, and capital gains), self-employment income, pensions and annuities, business income, and Social Security income.
2. Top 1% and Top 5% Income Levels:
- The top 1% of earners make $500,000 or more, while the top 5% earn $200,000 or more.
- The real median household income in 2021 was $70,784, showcasing the significant income disparity.
3. Income Composition by Level:
- The composition of income sources varies across income levels. Notably, capital gains become more prominent at higher income levels.
- For the bottom third (income $25,000 or less), salary and wages constitute 79%, while investment income is only 4%. In contrast, the top third (income $75,000 and above) sees a shift with salary and wages contributing 48%, and investment income taking a more substantial share at 27%.
4. Making Money Like the Rich:
- The article suggests that the rich derive a substantial portion of their income from investments, with the top 5% earning over two-thirds of their income from this source.
- Stock market investment is emphasized as one of the primary wealth-building tools for the rich, with many investing in stocks and bonds to generate passive income.
5. Millionaire Strategies:
- Becoming a millionaire is portrayed as a gradual process, with only 5% achieving this status in less than 10 years. It typically takes around 28 years, and the average age at which millionaires reach this milestone is 49.
- The study reveals that most millionaires did not receive significant inheritances, and the majority did not have exceptionally high salaries. Instead, they focused on education, debt management, and disciplined spending, emphasizing the importance of investing regularly.
6. Investment Vehicles:
- Millionaires often utilize company 401(k) plans, IRAs, and separate brokerage accounts for investment. Diversifying investment portfolios through these avenues is considered crucial for financial success.
In conclusion, the article demystifies the secret to making money like the rich by emphasizing the significance of capital gains, diversified income sources, and strategic investment practices. It underscores the importance of disciplined financial habits, long-term planning, and leveraging various investment vehicles to build substantial wealth.
