Some people are born into wealth. But a lot of people who end up wealthy don't start out that way. Rather, they come from modest means and end up rich through hard work and savvy investing.
Now, it's probably not a secret that a lot of rich people are able to get to where they are by putting their money into stocks and other assets, like real estate, that can gain value over time. But here are some lesser-known ways the rich can grow their wealth.
1. They hold their assets for a long time
A big part of growing wealth is being patient. The stock market has a long history of rewarding investors, but sticking with it is key.
If you invest on a short-term basis, you might actually lose money in the stock market. If you invest over many decades, you're likely to make money.
Over the past 50 years, the stock market, as measured by the S&P 500 index, has averaged an annual 10% return. But rest assured that the market had plenty of down years during that time. Overall, though, its performance was strong. And so anyone who started investing 50 years ago without having bailed on their holdings during downturns is likely looking at a large sum of money right about now.
2. They benefit from tax breaks
Investing in a tax-efficient manner is another way rich people can get even wealthier. Investing in a traditional IRA or 401(k) plan means getting to invest with pre-tax dollars and enjoying tax-deferred gains. Investing in a Roth IRA or 401(k) means benefiting from tax-free gains.
The wealthy are also likely to know that holding investments for at least a year and a day before selling them at a profit can lead to lower taxes. That's because investments in this category are subject to long-term capital gains taxes, which are less expensive than taxes on short-term gains (those that apply to investments held for a year or less).
The wealthy can also invest in assets that result in tax savings. Those who pay a mortgage to own a home, for example, can deduct the interest they pay on the loan.
This isn't to say that the wealthy cheat the system or don't pay their fair share of taxes. A recent report from the Tax Foundation found that the wealthy’s share of the U.S. income tax burden has never been higher. Rather, the wealthy most likely read up on the tax code and use it to their benefit (or spend some of their money to hire accountants to help them maximize their savings).
3. They can afford to take on more risk in their investment portfolios
The wealthy have a lot of money at their disposal, so much so that it allows them to take on risks that the typical person can't. For example, we learned that the stock market's average return over the past 50 years has been 10%. Investing in the stock market is risky, but it's a moderate risk due to historical data pointing to strong returns overall.
Someone wealthy might be able to put $100,000 into a truly risky investment that's likely to yield a 20% or 25% return because that sum might only represent a small fraction of their total assets. Someone who only has $100,000 in total generally can't afford to take that chance.
How you can follow wealthy people's lead
Some of the strategies available to the rich are equally available to average earners. If that's the category you fall into, you should know that you could do quite well for yourself by investing in the stock market. Putting $10,000 into an S&P 500 ETF and leaving that money alone for 45 years could grow it into $729,000, assuming a 10% average yearly return.
You can also use the same tax tricks to minimize your IRS burden and grow more wealth. That means holding investments for at least a year and a day, and saving in tax-advantaged accounts like IRAs and 401(k)s. Plus, you should know that you don't necessarily need a ton of money to hire an accountant or financial advisor who can walk you through different tax strategies.
Also, while it does take quite a bit of money to buy a home, once you do, you can benefit from the mortgage interest deduction if you itemize. You may also be able to deduct the cost of your home office if you're self-employed or run a small business from home.
The one strategy you may not be able to employ is taking on added risk in your portfolio -- meaning, risk beyond the general risk of buying stocks. But otherwise, you still have options. And if you make the most of them, you may find that you're able to grow quite a lot of wealth over time.
