If you had to Google the richest people in the world right now, familiar names like Elon Musk and Jeff Bezos would be the first to appear, but is net worth simply associated with how much money one can amass?
In a recent survey commissioned by Empower that interviewed a sample of over 2,000 people, it transpires that even though 91% of adults in the US have heard of the term ‘net worth’, only around 35% of them expressed confidence when it came to the actual meaning of the phrase – but does it even matter? Technically speaking, everyone has a net worth and keeping track of that could help you figure out your financial stability.
This classification often includes having significant investments in stocks, bonds, and other financial instruments. High net worth individuals (HNWIs) have unique financial needs, requiring specialized wealth management services. Factors like income, lifestyle, and investment strategy play a role in reaching this status.
As one can imagine, the way an HNWI earns money cannot be pigeonholed into one mere category. Moreover, there may be a variety of ways to get a passive income. But we’re not talking about an ordinary means of making money, for instance, playing at an online casino – although this NetBet Casino review by NoDeposit365 UK gives you some solid pointers on placing strategic bets. But it goes beyond that…
What Do We Mean by Net Worth?
In simple terms, net worth is calculated by considering anything you own and subtracting anything that you owe, so it’s assets minus liabilities. Even though this concept might seem relatively straightforward, there’s often disagreement concerning the finer details when working out this calculation. The broadly accepted definition of a high-net-worth individual is someone with a minimum of $1 million in liquid assets.
Assets and Liabilities
Out of the people surveyed, around 35% of respondents felt that their mortgage should be factored in when calculating net worth, while 59% agreed that home equity should also be included. Property value, checking and savings accounts, retirement funds and financial investments are all other factors that should be included when working out this calculation, as these are all considered assets. It’s interesting to note that while many respondents said that their cash should be included, fewer considered their debt.
Becoming a High Net Worth Individual
Even though the formula to becoming a HNWI is relatively simple in theory, the reality is that it requires ample thought and an infinite amount of consistency. While the path to high wealth is never completely linear, here are a couple of points to keep in mind if you’re planning on heading that way.
1. Invest in Stocks
Most financial experts would agree that investing in the stock market is one of the best ways to grow your wealth and hedge against inflation, and the math here speaks for itself. If you take the S&P 500 for example, this has returned over 10% each year on average for the past 100 years, while other data shows that the FTSE All-World Index has consistently delivered an annual return of just over 9% on average since the 90s. While investing can potentially yield some pretty good results, it’s crucial to have a professional strategy in place that aligns with your goals, needs, and risk tolerance.
2. Diversify Your Portfolio
Another point that most financial experts would agree upon is the importance of building a diversified investment portfolio. This means making investments in a range of asset types, companies and industries to spread your risk. In other words, never put all your eggs into one basket.
3. Make The Most Out of Compound Interest
When it comes to increasing personal wealth, the power of compound interest should never be underestimated. If you’re not entirely sure what we’re talking about here, visualize a snowball rolling down a hill, collecting new snow along the way and becoming bigger as it progresses. This can be compared to your finances, where you’re able to grow wealth exponentially over time. Let’s say you’re a 25-year-old with savings of around $400, and a plan to invest $200 a month for the next 40 years. Assuming there’s an annual rate of return set at around 10%, your balance should reach over the $1 million mark by the time you turn 65.
Benefits of High-Net-Worth Individuals
It comes as no surprise that being wealthy has its perks, here are a couple to aspire to:
1. Value-Added Benefits
Many financial investors have taken a page out of the airline playbook and categorised their clients into different tiers or segments based on their managed assets rather than overall activity. While perks may vary from one firm to the other, many HNWIs benefit from several perks including reduced fees, VIP access to events and conferences, exclusive tickets to theatrical, entertainment and sporting events, as well as a dedicated money manager amongst others.
2. VIP Treatment
The larger the wealth managed, the more attention the HNWI will generally receive. This includes but is not limited to personal concierge services, complex and bespoke financial strategies as well as other benefits that make sense at this level of wealth.
3. Increased Opportunities
Because of their overall financial value, HNWIs tend to gain more attention from financial investors, as well as gaining access to several opportunities Main Street investors can’t access. For instance, at some point, Morgan Stanley offered its clients that ranged from $2 million or more the chance to invest in new Bitcoin funds simply based on their net worth.
HNWI Key Takeaways
A high-net-worth individual is a person whose liquid assets range anywhere between $1-$5 million. Keep in mind, however, that this definition isn’t set in stone and some institutions may choose to define this range differently.
HNWIs often bank with wealth management firms or private banks and generally have increased access to additional services beyond investment and banking.
Net worth is calculated by amassing assets and subtracting any liabilities, which could include investment accounts and real estate amongst others.
Becoming a HNWI takes smart financial planning and a lot of hard work, but the truth is that anyone can improve their financial status through a series of saving strategies, sound planning and budgeting.
