8/20/2012 2:15 PM ET|
What the 1% know about money
The very rich may indeed be different from you and me, if we lack some fundamental understanding of money and how to manage it. Here's what we can learn from them.
Making sweeping generalizations about any group of people is tricky. The poor aren't all alike. Neither are the rich.
But there is a set of attitudes, assumptions and values that seems to be more prevalent among the wealthiest families than among the general population. I turned to some experts who specialize in advising the rich, including one who's an heiress, for some insights on what high-net-worth people know about money.
Again, these ideas aren't the exclusive property of the rich; nor are they universally held among the 1% families that hold about 40% of our nation's wealth. But they can provide some food for thought for the rest of us to chew on.
Education is important
Many Americans question the value of a college education. The wealthy typically don't. (Read "Should your kid skip college?")
"They not only have their kids go to college, but they want them to go to the elite schools," said Linda Davis Taylor, the CEO of Clifford Swan Investment Counsel, a Pasadena, Calif., wealth advisory firm. "They want their kids to maintain the social and culture position that these families have worked so hard to achieve. . . . They want that continued access to power and influence."
(Taylor has particular insight into this phenomenon: She's the chairwoman of the board of Scripps College in Claremont, Calif., and before she joined Clifford Swan she was the dean of admissions at Claremont McKenna College. She has also worked for Amherst College in Massachusetts and Emory University in the Atlanta area.)
There are exceptions, of course. Myra Salzer, who runs the Wealth Conservancy in Boulder, Colo., said some of her clients include wealthy Texas ranching families that value business acumen and hands-on know-how over formal degrees. The black sheep of another family she knows is a surgeon; he's disdained because he chose medicine over participating in the family business.
Still, the exceptions more than prove the rule.
"There are some (wealthy) families that don't value education, but that is really rare," said therapist Thayer Willis, the author of "The Dark Side of Wealth" and an heir to the Georgia-Pacific fortune. "It's really considered to be one of those things that you do."
What can the rest of us learn from this?
You may not be able to get your kids into Harvard, but make sure they get at least some post-secondary education. Well-paying jobs that don't require college degrees are fast disappearing, and the unemployment rate for those with only a high school diploma is twice that of those who have a college degree. Economists tell us that a college degree will be all but essential for those who hope to remain in the middle class, let alone advance economically.
Rich is relative
Elsewhere in the top 1%, there's actually a fairly wide variation in wealth. About 1.4 million households qualified as the top 1% of taxpayers, according to 2009 Internal Revenue Service statistics, the latest available. The minimum adjusted gross income needed to qualify was $343,927, while the average income of the top 1% was just under $1 million.
But even people with million-dollar annual incomes and multimillion-dollar net worths don't necessarily define themselves as wealthy.
"If you ask them 'Are you rich?' or 'Are you filthy rich?' they don't think that they are," Salzer said. "They can always point to someone who is richer than they are."
What can the rest of us learn from this? Perspective. As humans, we tend to compare ourselves with those who are better off -- even if many, many people are far worse off. Folks at the bottom of the economic ladder in the U.S. are wealthier than most people in developing nations where access to clean water or sufficient food aren't givens. According to the World Bank Development Group, 85% of the world's population has an income of less than $2,200 a year. If you want to see where you stand vis-à-vis the rest of the world, check out the Global Rich List.
Wealth is not a do-it-yourself endeavor
More money brings more complexity. The rich tend to hire legions of professionals to tend to their investments, advise them on tax strategy, ensure they're adequately insured and plan their estates, among other tasks.
Sometimes they get fooled by crooks, as the Bernie Madoff swindle shows. In general, though, the rich have access to many of the best and the brightest of advisers, who can make a lot more money advising the affluent than advising the middle class.
"Typically, wealthy people have access to the good ones," Willis said.
Should that make the 99% despair? Not necessarily, because there are also plenty of good advisers serving the not-rich. But good advice costs money, and the not-rich are sometimes reluctant to pony up.
What can the rest of us learn from this? If your finances are fairly simple, you can handle them yourself. Once you start accumulating some assets, though, you'll probably want to get professional advice. If you have a lot of investments or a small business, for example, you should have a tax pro. Once your estate is worth several hundred thousand dollars, you need to talk to a fee-only financial planner and an estate-planning attorney. There's simply no way you can be as expert in a field as someone who does it 24/7.
Money may indeed buy happiness, but . . .
The research on wealth and happiness is mixed. Some researchers suggest there's a satiation point where, once basic needs are met, increases in income don't produce much more in the way of happiness.
Other researchers have found that the rich are way, way happier than the poor. One Gallup poll found that 90% of people in households making at least $250,000 a year called themselves "very happy," compared with 42% of those with household incomes below $30,000.
Clearly, wealth can eliminate a lot of drudgery and anxiety. But the rich aren't spared from death, illness, addiction and the other heartbreaks in life, Salzer noted. They still get divorced, she said, or have problem children.
"The 1% know that just having money doesn't automatically make you happy," Willis said, "though the other 99% would like to give it a try."
What can the rest of us learn from this? It stands to reason that people with a few dollars in the bank will be less anxious than those who live from paycheck to paycheck. Money may not insulate you from life's setbacks, but it can help you cope with them.
Kids need to be taught about money
There's a saying the haunts entrepreneurs: "Shirtsleeves to shirtsleeves in three generations." The one who builds the fortune, working in his shirtsleeves, turns it over to subsequent generations who waste it, so the grandkids or great-grandkids are back working in shirtsleeves.
Even families that have been rich for several generations worry that their progeny could squander the wealth -- and for good reason.
"Inheritors who get money plopped in their lap, with no education -- that usually doesn't play out well," Willis said.
So wealthy families tend to expend considerable effort to make sure their kids understand the fundamentals of handling money. Willis said some families require their kids to take an accounting course in college, "so that they can talk the language of business and money." Many use philanthropic giving as a way to involve and instruct their children in finances (and the family's values), Taylor noted. The children are encouraged to research charities, help choose the recipients and monitor the investments that produce the funds used for philanthropy.
Another common approach, Willis said, is to give the kids a chunk of their inheritances early -- often upon turning 21 -- to give them experience in handling large sums. Even if they blow the money, they'll learn some important lessons, including that money is a finite resource.
What can the rest of us learn from this? Kids need money of their own so they can learn about budgeting, deferred gratification, opportunity cost (what you give up to get something else) and other important personal-finance concepts. Experts are divided about how much kids learn from allowances, but most agree that part-time jobs can be helpful in teaching kids the value of a dollar. (Read "Allowances: 'Welfare' for kids?")
One of parents' most important roles is to let their children make mistakes and not bail them out. Living with the consequences of bad decisions teaches far more than a helping hand from Mumsy and Duddy.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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