Here is the secret to making money like the rich.
Capital gains matter more than you may realize. Income sources for those making millions of dollars a year are much different from that of the rest of the American population. According to information taken from the latest tax returns filed with the IRS, salaries and wages make up about half (46%) of the income earned for those making $1 million to $1.5 million. However, salaries and wages make up 83% of the total income for those making $30,000 to $40,000. Here's a closer look at where the rich get their money.
Main income sources
As you might expect, the rich get a larger share of their income from investments than the poor do. In fact, the top 5% of earners get over two-thirds of their income from investments. The rich also have more sources of income. Here are some of the main sources of gross income for Americans:
- Salary and wages: W-2 income from your job
- Investment income: From interest, dividends, and capital gains
- Self-employment income: Payments you receive from selling products or services
- Pensions and annuities: Payments from qualified retirement plans
- Business income: Payments from owning a stake in a private company
- Social Security income: Retirement benefits from the federal government
The top 1% make $500,000 or more
The real median household income was $70,784 in 2021, according to the U.S. Census. However, there is a wide disparity in income. According to the latest available tax returns, the bottom 50% of Americans made less than $40,000, and the top 5% of Americans made over $200,000. There were 157,197,473 tax returns filed for 2021. Here's a breakdown of the adjusted gross income (AGI) levels represented:
- Bottom third: $25,000 or less
- Middle third: $25,000 to $75,000
- Top third: $75,000 and above
- Top 5%: $200,000 or more
- Top 1%: $500,000 or more
Income sources by income level
Capital gains make up a larger share of your income the higher you are on the income ladder. Capital gains is the profit you make from selling an investment or property. Here is the percentage that a source of income accounts for at that income level:
- Bottom third: $25,000 or less
- Salary and wages: 79%
- Investment income: 4%
- Self-employment income: 10%
- Pensions and annuities: 14%
- Business income: 0%
- Social Security income: 50%
- Middle third: $25,000 to $75,000
- Salary and wages: 81%
- Investment income: 2%
- Self-employment income: 3%
- Pensions and annuities: 10%
- Business income: 0%
- Social Security income: 9%
- Top third: $75,000 and above
- Salary and wages: 48%
- Investment income: 27%
- Self-employment income: 2%
- Pensions and annuities: 6%
- Business income: 16%
- Social Security income: 2%
- Top 5%: $200,000 or more
- Salary and wages: 41%
- Investment income: 34%
- Self-employment income: 2%
- Pensions and annuities: 4%
- Business income: 20%
- Social Security income: 1%
- Top 1%: $500,000 or more
- Salary and wages: 37%
- Investment income: 37%
- Self-employment income: 2%
- Pensions and annuities: 3%
- Business income: 22%
- Social Security income: 0%
The top 5% make more money from their investments and business interests than their salary and wages. The bottom third heavily rely on Social Security and their salary and wages. The rich also make money from their private business investments. For those making $10 million or more a year, their salary only makes up 17% of their income and their investment income makes up 67%.
How to make money like the rich
The stock market is one of the primary sources of income for the rich. Many wealthy individuals invest in stocks and bonds as a way to generate passive income. According to one of the largest studies of millionaires ever conducted, millionaires did not build a net worth of a million dollars or more through inheritance. Only 2% of millionaires said they came from an upper-income family. It took hard work, discipline, and investing regularly to reach millionaire status.
According to the survey, eight out of 10 millionaires invested in their company's 401(k) plan. In addition to taking advantage of their workplace retirement plan, three out of four of those surveyed also invested in an IRA and separate brokerage account. These simple steps were some of the primary keys to their financial success.
Becoming a millionaire doesn't happen overnight. Only 5% attained that feat in less than 10 years. It took the vast majority 28 years to become one, and the average age they hit that milestone was 49. Plus, eight out of 10 millionaires did not receive a dime in inheritance. Only 31% averaged more than $100,000 in salary earnings, and one-third didn't make six figures in any working year at all. You don't have to come from a rich family or make lots of money to become a millionaire. The millionaires in the study focused on their own education, stayed out of debt, and watched their spending. By spending less than they earned, they were able to invest and build the foundation of their wealth.
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