4 Tricks Billionaires Use to Make Their Money Work for Them

(Fool) -- Most of us will never see $1 billion in our lifetime, but getting to $1 million isn't as difficult as you might think.

There isn't a single path to riches, but one thing all millionaires and billionaires seem to know is how to make their money work for them so they can spend more time enjoying the fruits of their labor and less time tied to a desk.

It's not rocket science. By putting your money in the right places and seeking out new opportunities to generate income, you can boost your net worth faster than you think. Here are four steps to get you started.

1. Invest

The best way to grow your money is to invest it -- but you have to invest the right way. That means maintaining a well-diversified portfolio where your money is spread out between many different investment products and across sectors. For example, don't put all your money into energy stocks in case the industry experiences a crisis that hurts the value of all your investments.

You don't need a lot of money or expertise to begin investing. With the rise of robo-advisors and mobile investing apps you can start with just a few dollars. Mutual funds and exchange-traded funds (ETFs) are both collections of investment products, including stocks and bonds, so buying just one of these provides instant diversification.

Always be mindful of the investment and brokerage fees that eat into your profits. Don't pay more than 1% of your assets in fees each year.  Index funds are a great choice for investors trying to keep costs low. These are mutual funds designed to passively track and mimic the performance of a market index, like the S&P 500, and historically, they've delivered pretty consistent returns. 

If you don't know how to invest your money properly, consider hiring a financial advisor to do it for you. Choose a fee-only financial advisor who's a member of the National Association of Personal Financial Advisors or other esteemed organization. In contrast, fee-based advisors earn commissions by recommending investment products that may or may not be your best option, so avoid them in favor of fee-only advisors. Always ask for a copy of the fee schedule before hiring a financial advisor and don't be afraid to speak with a few advisors to find the best option.

2. Stash long-term savings in tax-advantaged accounts

You may think billionaires don't need to save in retirement accounts, like 401(k)s or IRAs, and you'd be right. But many do anyway because they offer tax advantages not available in traditional brokerage accounts.

Money you put in traditional IRAs and 401(k)s reduces your taxable income in the year you contribute it. You have to pay taxes on your distributions in retirement, and the tax rate depends on which income tax bracket you occupy during retirement. You can save money on taxes if you're in a lower bracket in retirement than you are today.

Roth 401(k)s and IRAs work the other way. You pay taxes on your initial contributions, but then the money grows tax-free afterward and you don't pay money on your distributions in retirement. These accounts can help you save if you believe you're in the same or a lower tax bracket today than you will be in retirement.

You may contribute up to $19,000 to a 401(k) in 2019 or $25,000 if you're 50 or older. You can also contribute up to $6,000 to an IRA or $7,000 if you're 50 or older. These accounts are a good place for long-term savings, but they're not ideal if you need to access the funds soon. You'll pay a 10% early withdrawal penalty if you take money out before you're 59 1/2 unless it's for a qualifying reason, like a first-home purchase or higher education expenses.

3. Use high-yield savings accounts for short-term savings

Retirement accounts and taxable brokerage accounts aren't an ideal place for short-term savings. You're penalized for early retirement account withdrawals and investments in taxable brokerage accounts may be volatile over the short term.

A high-yield savings account is a better bet.

The typical savings account annual percentage yield (APY) is 0.09%. That means if you put $1,000 in a savings account, it'll only be worth $1,004.51 five years later. But high-yield savings accounts can have APYs of more than 2%. A 2% APY would result in a balance of $1,105.08 after five years. Inflation averages about 3% annually, so it would still erode some of the value of your dollars, but it wouldn't do nearly as much damage and you'd still be free to access your money whenever you need it. Check your current savings account interest rate and if you're not happy with it, consider moving your money to a high-yield savings account instead to grow your money faster.

4. Seek out passive income streams

Billionaires know there are other ways to earn money besides working a 9-to-5 job. Investing is one option. Starting your own business or side hustle so you decide how much to work is another. But there are also ways to earn money that require far less time and effort: passive income.

If you own a rental property or you have a spare room, consider renting it out. If you have a passion for art, music, or writing, consider selling your work and collecting royalties. Start a blog about a topic you know well and sell ad space or exclusive content.

These plans may require time and effort initially, but once you get them set up, you can more or less sit back and watch the money come in.

Think about what you're good at and what you're passionate about, then look for opportunities to generate side income with these skills.

There infinite ways to become rich, but all of them begin with good money management skills and a thorough understanding of the best places to put that money.

You won't become rich overnight, but by following the above strategies, your nest egg will grow over time.

Something big just happened
I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations. Together, they've tripled the stock market's return over the last 13 years.* And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Popular

More Articles

Popular