Compared to everyone else, how are you doing financially? According to Federal ReserveThe actual median net worth of American families was $192,900 in 2022, an increase of 37% from 2019.
If your net worth is around this amount, you may feel financially comfortable, but you’re far from being a “high net worth individual” (HNWI). Although definitions vary, an HNWI is generally an individual with at least $1 million in net worth in liquid assets. In the United States, 5.3 million people, or less than 2% of the total population, are considered HNWIs.
Here’s what it means to be an HNWI and how finances work differently for this elite group.
What is a high net worth individual (HNWI)?
A high net worth individual is someone with $1 million or more in net worth in liquid assets, including Bank accounts, stocks, bonds and cash. Technically, someone can be a millionaire and not meet the definition of an HNWI because their money is tied up in illiquid investments, like real estate.
A wealthy person can come from different fields and locations. However, HNWIs tend to have certain traits in common. The cities with the most millionaires are New York, the Bay Area, Los Angeles, Chicago and Houston, according to the Henley & Partners 2023 U.S. Wealth Report.
Among the very rich, there are even more commonalities. Centimillionaires – those with a net worth of $100 million or more – tend to attend Ivy League universities. Forty-five percent of the nation’s centimillionaires attended Harvard University, the Massachusetts Institute of Technology, Stanford University, the University of Pennsylvania, Columbia University or Yale University.
How financial management is different for HNWIs
If you meet the criteria of a high net worth individual, your financial approach will likely be different from those with less cash. Rather than worrying about goals like build an emergency fund Or saving for a down payment on a houseperhaps you’re focused on the longevity of a family business or a long-term charitable legacy.
To achieve these goals, you can use different strategies and take advantage of other opportunities.
Wealth management vs. financial planning
Typical investors may meet with a financial planner or financial advisor, while HNWIs typically have access to wealth managers. Due to the amount of investable assets they have, financial institutions and investment companies offer private wealth management services to HNWIs who offer a higher level of personalization and service.
Wealth management can be a more holistic approach to your finances, combining investment strategies with tax optimization and asset protection.
For example, at Morgan StanleyPrivate wealth management clients have access to holistic services, including cybersecurity technologies, health and travel concierge services, and even special member events.
Investment Opportunities
HNWIs can often access different investment opportunities than other individual investors. For example, HNWIs may have the opportunity to invest in private stocks and hedge funds or even act as angel investors for startups, allowing them to own shares of promising young companies.
For example, JPMorgan offers alternative investment options to private wealth management clients. To diversify their portfolios, clients can invest in hedge funds or real assets such as oil, gold or real estate.
HNWIs may also qualify for accredited investor status and invest in securities that are not registered with the U.S. Securities and Exchange Commission (SEC). According to the SEC, accredited investors must have a net worth of at least $1 million (excluding primary residence) and an individual income of at least $200,000 ($300,000 with a spouse or partner).
Estate planning
Those who fall into the HNWI category often strive to leave a legacy for their family and build generational wealth. In this context, they invest in objectives other than the education or upbringing of a child. retirement; they seek to generate returns well beyond their life expectancy.
HNWIs will also work with wealth managers to optimize their taxes and streamline the process of transferring wealth to future generations. For example, private wealth management clients with Fidelity can work with a Fidelity advisor for estate and succession planning. The advisor will coordinate with your lawyers and accountants to preserve your assets and pass on your assets to future generations.
Charitable donation
For HNWIs looking to improve their community, charitable giving is an important part of their financial plans. Those with significant assets will likely benefit from a different perspective on philanthropy. Working with a wealth manager can maximize the impact of your donations; Instead of a one-off lump sum, the wealth manager can arrange a bequest that uses donor-advised funds to continue to earn interest and returns, making your gift last for years.
Reach the HNWI threshold
If your goal is to become an HNWI, either for the tangible benefits the distinction can bring you or because of a mental milestone you have set, there are ways to achieve your goal, even if you don’t earn at six digits:
Invest: To grow your money and protect yourself against inflation, you have to invest in the stock market. Investing early will allow your money to compound and grow over time. And the sooner you start, the better, especially if you have a modest amount to invest. For example, let’s say you started investing at age 30. Assuming you invest $300 per month and earn an average annual return of 8%, you would have over $1 million in savings by the time you reach 65. If you increase your monthly investment to $500, you would have almost $1.8 million.
To be coherent: Although watching the value of your investment portfolio fluctuate can be scary, don’t panic and pull your money out of the market. The stock market naturally fluctuates over time and, historically, has produced a positive return over the long term. Withdrawing your money only locks in your losses.
To diversify: Diversifying your portfolio means investing in a range of companies, sectors and investment types. If one investment performs poorly, the performance of others can offset your losses, helping to protect your money. You can diversify your portfolio on your own, by using a robo-advisor, or by consulting an investment professional to create your portfolio.
