Have you ever wondered how the richest people in the America made their money? The answer may surprise you. It's an answer that might make you feel better about your chances of someday being financially secure. Recently, the IRS released 2009 data detailing the tax returns of the richest 400 people in America and here's what the data shows.
For those who believe that the rich are getting richer and poor are getting poorer, the data confirms one half of this belief. The rich are definitely getting richer. From 1992 to 2007, the income of one of the average top 400 richest people grew by 650%, but it wasn't from pay raises, better jobs or an inheritance. The richest people make their fortune through capital gains. Capital gains come from investment income. If you have money in a savings account you know that you receive interest (probably not much at todays rates). These are capital gains and this represents an income that you don't have to work for. As more money is invested, the income from these capital gains steadily increases and over time and can turn into an impressive income stream.
What does this data mean for the American who doesn't find him or herself in the top 400 richest people? It means that your financial choices, just as much as the amount of money you make, might determine how financially secure you are later in life. How can you better make your money work for you?
SEE: What You Need To Know About Capital Gains And Taxes
Get Rid of Debt
Let's do the math on debt. Let's say you have $10,000 worth of credit card debt and you're paying 15% interest on that balance. That's $1,500 you're throwing away each year. Now, let's say that you pay off the debt and instead invest that $1,500 each year for the next 20 years at an annual rate of 6%. How much money would you have at the end of the 20 years? You would have more than $63,000 once capital gains are added in.
What other debts do you have in your life? Find a compound interest calculator online, assume a 5% or 6% annual interest rate and see how much money you would have if each of those debts was paid. You'll likely still have a mortgage, but what about cars, store credit cards and other debts?
Maybe you don't make enough money to pay off the debts or you wouldn't have the debt in the first place, right? Not so fast. Nearly all Americans are spending money on products that aren't necessities. Those "wants" can be eliminated. You don't have to have Starbucks, cable TV or high-priced cell phone plans. If you were to temporarily live without these wants and apply that money to your debts, you could likely pay down your debts quickly. Cutting out three days of Starbucks per week saves roughly $1,040 each year. If that money was invested each year for 20 years, along with 6% interest, that's more than $40,000.
Find a Second Job
After a long day of work, the last thing you want to do is go back to work, but what if you took on a second job for the purposes of paying down debt? You wouldn't have to work two jobs forever, but if you're serious about improving your financial situation, this may be the best way to put a dent in your debt. Are there other opportunities at your current job? How about helping a friend who owns a business? Get creative. Ten hours a week at $10 per hour equates to about $3,600 after taxes. What if you continued to work a part-time job for 20 years without ever getting a raise? You would roughly have an extra $130,000.
SEE: When You Shouldn't Get a Second Job
The Bottom Line
Politicians, as well as the American public, don't like that the rich are getting richer, but the strategies the rich use can be copied by any American. Some of these ideas won't be appropriate for everybody, but paying off debt, eliminating some of the non-essentials and working a second job could result in a significant amount of money after 20 years.