Your net worth composition will likely change the wealthier you get. The wealthier you get, the generally more conservative your net worth allocation.
For example, my net worth composition in my 40s looks nothing like it did when I was in my 20s. I have a family to take care of don’t want to go back to work. As a result, my net worth composition is more conservative with 26% in public equities.
If you’re looking for how net worth compositions change by wealth, take a look at the below chart by Visual Capitalist. It highlights how much each asset is as a percentage of net worth from the Federal Reserve of Consumer Finances. After all, if you want to get rich, it’s good to study how the rich allocate their money.
Notice how red (primary residence) quickly shrinks the wealthier you get while blue (business interests) quickly grows. The key to creating great wealth is to, therefore, build a business or acquire a significant share of equity in a business.
Net Worth Composition By Levels Of Wealth
Let’s discuss each asset class in a little more detail. I think most Financial Samurai readers or people looking to achieve financial independence are targeting net worth amounts between $500,000 – $10,000,000. Therefore, my commentary is tilted towards this mass affluent net worth range.
Liquid Net Worth
As your net worth grows, you don’t need to maintain the same percentage of liquidity to survive through difficult times because the absolute amount of your liquidity increases.
The only reason you would need a large percentage of your net worth in liquid assets is if you are highly leveraged. Shoot for 5% – 10% of your net worth in Liquid assets.
Related: The Need For Liquidity Is Overrated
Primary Residence
Notice how there is no asset category for Rent because Rent is a net worth drag. Everybody needs to figure out the right time to own their Primary Residence to at least stay neutral inflation.
I’m surprised the Primary Residence category doesn’t take up an even greater percentage of net worth in the $100,000 and $10,000 net worth levels. During the financial crisis, so many Americans got obliterated because their Primary Residence was such a dominant portion of their net worth.
I’d get your Primary Residence down to 10% – 30% of your net worth using my Primary Residence Net Worth Rule. Live well, but make sure your home doesn’t become a drag.
Related: Why Real Estate Will Always Be More Desirable Than Stocks
Vehicles
Like Primary Residence, the Vehicle percentage also declines rapidly as one’s net worth grows. Vehicles are the most common net worth killer in my opinion. For some reason, Americans have a love affair with cars and trucks.
Maybe that’s why folks in the $10,000 range have a huge portion of their net worth in Vehicles. The median price of a new car at about $48,000 after tax in 2023. Meanwhile, the typical American is spending the majority of their ~$76,000 gross household income on a car. That’s nuts!
For financial freedom, please don’t spend more than 1% – 5% of your net worth or 1/10th of your gross income on a car.
Retirement (Pension/IRA/401k)
Only a minority of Americans are now eligible for a pension. But for those who do have a pension, its value is much greater than you might realize. Given the contribution limits to a IRA and 401k, it’s hard for Retirement to grow into a significant portion of one’s net worth.
What’s interesting about the data in the chart is that those with a $1,000,000 net worth have the largest percentage of their net worth in Retirement. Therefore, if you’re amenable to finishing work as a “run of the mill millionaire,” you should strive to max out your pre-tax retirement plans for as long as they work and treat it as bonus money once you are eligible to withdraw funds penalty free.
Related: How Much Should I Have In My 401(k) By Age?
Life Insurance
The fact that Life Insurance is one of the designated asset classes in the chart shows its importance in financial security. Many employees get Life Insurance as a default benefit from work. But often the amount is not enough to fully cover all liabilities.
Term Life insurance is cheap before the age of 35 if you are healthy. I highly encourage readers to lock in a long-term policy before a health issue occurs that jacks up your rates. I’m guessing the value of a whole life policy has something to do with this category.
If you want to get competitive life insurance quotes, check out PolicyGenius. PolicyGenius enables you to apply for life insurance in one place and compare the different quotes. If you have dependents and debt, please get life insurance coverage. The coverage should last until the debt is paid off or the kids become independent adults.
During the pandemic, my we realized my wife had half the life insurance coverage as I did. That made no sense since we are equals who both run Financial Samurai and take care of our kids. Through PolicyGenius, she was able to double her life insurance coverage for less!
Mutual Funds
I’m surprised Mutual Funds has the largest weighting for those in the $10,000,000 net worth level. If Mutual Funds are defined as actively run funds with high fees, then digital wealth advisors should channel their efforts towards these high net worth individuals.
Hopefully most investors are invested in index funds instead of actively run mutual funds. For 90% or more of your investable assets, I recommend investing passively.
Stocks
It’s also interesting to see how Stocks increase as a percentage of net worth the wealthier one gets. Perhaps there’s a higher level of knowledge or conviction as wealth grows.
But I suspect the real answer is that wealthier individuals have a greater percentage of net worth in their company stock. They are either company founders or senior executives with lots of RSUs or stock options. The net worth composition tends to tilt more heavily towards equity the richer you get.
Related: The Benefits Of Stocks Over Real Estate
Fixed Income
Despite the Fixed Income Market being much larger than the Stock Market, it’s surprising to see how little the Fixed Income weighting is across all wealth tiers. However, given interest rates have been coming down since the 1980s, it’s understandable that fewer people want to invest in fixed income.
One can make the assumption that Fixed Income is an uninspiring tool to stabilize wealth. It can be considered a Liquidity+ investment. Think about fixed income not so much as a wealth driver, but as a capital preservation tool. It’s better to make 2% on your 10-year Treasury bond than lose 20% in a bear market.
Managed Assets (Trust)
It makes sense that the $10 million and $100 million levels have the highest percentage attributable to Managed Assets. You could pass down all your assets estate tax free up to $12.92 million per person in 2023. This amount is about double the estate tax threshold amount before the Tax Cuts And Jobs Act was passed in 2017.
However, it bears to reason that eventually, the estate tax threshold will go down under a democratic president. Let’s see who remains in office in the future.
But everybody should create a revocable living trust. You’ll save money and make clear your directors to your beneficiaries.
Real Estate (rentals/vacation properties)
Notice how Real Estate has the largest weighting for those in the $1,000,000 net worth group. However, real estate drops off with higher wealth levels.
In other words, Real Estate is one of the easiest ways to boost wealth to $1,000,000. After that, it becomes less desirable as time goes on due to maintenance, hassle, and ongoing property taxes.
Because you no longer will have the time or desire to deal with tenants and maintenance issues as your wealth increases, investing in real estate crowdfunding platforms such as Fundrise is going to be increasingly popular over time.
I’ve personally invested $810,000 in real estate crowdfunding to diversify my San Francisco real estate holdings. Further, I believe in the long-term trend of relocating to lower-cost areas of the country. Rents and property prices should be rising.
I’m happy living in a right-sized house while investing excess capital in the heartland of America where rental yields are 4-5X higher. I also believe buying rental properties today makes sense.
The value of rental income is strong due to a relatively low interest rate environment. Below is my private real estate investment dashboard where I’ve received over $624,000 in distributions and passive income so far. Being able to invest so I don’t have to work as much is great!
Business Interests Is Huge For High Net Worth People
Finally, we arrive at the key to building a fortune. Even the $10,000 net worth level has a sliver of Business Interests.
When the current CEO of Uber joined, he reportedly got a compensation package of around $200 million. He didn’t have to come up with the idea, raise funds, and grind away for years for that type of money. His net worth composition is mostly in company stock.
All he has to do is be a good ambassador until he can sell all his stock after the company goes public. The current CEO of Google just sold stock worth $131 million and is getting another $340 million package.
Instead of becoming an executive, you can go the hard, but extremely satisfying route of creating your own business. The business doesn’t have to be based around a revolutionary new product. Instead, you can simply build a business around a lifestyle like Financial Samurai.
Lifestyle Business Or Big Business
In 2010, I asked myself whether I’d rather own a lifestyle business or a big business. The lifestyle business would one day pump out $250,000 a year in free cash flow with only 3 hours of work a day and minimal stress.
The big business had a 20% chance of getting a $25 million payout by working 14 hour days. I’d have to experience maximum stress for three years. I decided the lifestyle business was the way to go because money doesn’t buy happiness.
When you own a business, not only do you collect its profits, you can also sell the business for a multiple of its profits. This is where the illiquid portion of Business Interests comes in.
I’ve been approached a number of times since 2014 to sell. Each time I pass because I want something to do, especially now that I’m a stay at home dad.
Related: Top 10 Reasons For Starting An Online Business
A Different Mindset To Build Wealth
I was speaking to a very wealthy entrepreneur the other day. He said the greatest skill one can have is figuring out a way to hire talented people willing to dedicate their lives to making YOU rich.
Of course you will have to properly compensate them. However, it is these people who have confidence in themselves, but not enough confidence to make themselves rich through entrepreneurship who you want working for you.
Know your worth. If you are starting to get frustrated with the lack of efficiency at the office or you are beginning to tell yourself you can do it better, then give it a go. Make a better mousetrap.
When I started Financial Samurai in 2009 I found ZERO personal finance blogs written by people who worked in finance. They were all written by people trying to get out of debt. Or, they were written by engineers trying to optimize their content for credit card sign ups. What an opportunity to fill a void!
The people who get really rich are those who ask themselves, “Why not me too?” They believe they deserve to be rich and take action to make it happen.
Related: The Average Net Worth For The Above Average Person
Manage Your Net Worth Composition
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool. It will show you exactly how much you are paying in fees.
I was paying $1,700 a year in fees I had no idea I was paying. After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible.
You can easily analyze your net worth composition and optimize it with Personal Capital.
Invest In Real Estate
A good net worth composition has a solid real estate component. Real estate accounts for roughly 40% of my net worth because it is less volatile, produces income, and provides utility. In an inflationary environment as we’re heading into, you want to be long real estate.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Take a look at my two favorite real estate crowdfunding platforms. Bot are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build your own select real estate portfolio.
More Recommendations
Pick up a copy of Buy This, Not That, my instant Wall Street Journal bestseller. The book helps you make more optimal investment decisions so you can live a better, more fulfilling life.
For more nuanced personal finance content, join 55,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
Love this post!
In my opinion the objective of liquidity is not only to survive difficult times. Liquidity also allows you to invest when others are selling low. The level of required liquidity is also determined by how much you are hunting for opportunities (in distressed markets).
“these people who have confidence in themselves, but not enough confidence to make themselves rich through entrepreneurship”
To use a (very) anachronistic phrase, “chiefs need braves”. Put another way, there are more followers than leaders, and there always will be.
Sam, is you’re site only dedicated to high net worth individuals with a 5 million plus net worth? I get a little shocked when people say that can’t live on 1.5 or 2 million, etc. It would seem, like you, many of your followers are of high net worth and high income earners and seem to believe that if your not living in the bay area or upper east side Manhattan with a $6000+ per month mortgage and with over 5 million invested, you are living in poverty and less desirable areas of the US. I have first hand experience with living in the more breathable and roomier mid-west and we live very well. As a matter of fact, at this point I can’t find another useless material thing to waist money on. I am 53 and have a very nice newer 4 bd+den open floor plan home, 2 older Porsche’s one being a 911, a BMW 3 series, and a 10 year old Acura that has never failed me. My only vise is my watch hobby which I now have 6 Rolex’s and a few Omega’s watches I have collected over the years when prices weren’t so insane. All this means nothing as they are only material things. Freedom from working in early retirement has been the greatest joy ever and I live quite comfortably on $55,000 per year from dividends and interest. 10-12 years from now, I estimate I’ll collect another $2300 per month in social security so I feel very fortunate even though my numbers pale in comparison to many on this site.
Bruce,
You bring up a really good point & it has caused me to think rather deeply. I find it is almost impossible to find people “like me” to talk to but you sound just like me. I often wonder if Fin Samurai should have a private msg function where like minded people can get together and discuss ideas on what’s working, what’s not etc. This way we can share more & learn more individually than we would be willing to share broadly. I would be delighted to talk shop with someone such as yourself and compare notes. Maybe we call it the 1-5 millionaires club for lack of a better description.
Quick description of me, I have worked in Finance for 26 years and in real estate part-time for 15. I used the full time job to pay bills & save for retirement while using real estate sales (brokerage) to fund rental property purchases now worth 1 million and generates a similar dividend income as yours annually. I also sell real estate but only dedicate a few hours a week to the endeavor yet make 50-75k a year consistently doing that. My full time job pays around 150k but is in the process of being eliminated over the next 6-18 months. My wife has a good job at 135k a year so here I am, trying to decide if I keep working for other people or try to spend my time enjoying the back half of my life while working towards doubling my current net worth but doing it on MY terms and at the intensity that I decide. I would say I am about 3.6m as it stands today. My primary residence is 12.5% of my net worth and cars are less than 1%. Real Estate is about 40% of my net worth and I have 2m in investible assets 1.3 of which is retirement and the rest is taxable money and 10% cash. I am trying to decide if I can “afford” ,lol, to go from 400k year income cash flow to 200-250 as a family with 1 child but I will say at 400k we have more money than we spend as we live fairly frugally and only owe 78k on our 500k home and only owe 75k debt on 1m in invest properties. Obviously this is how I built the real estate business, with cash flows from working. So I have been thinking I can now leverage the houses to fund more real estate acquisitions or even buy a business but I want to be like Sam. I want to work 20-30 hours a week on my terms and life healthy but enjoying more of my life while I continue to build my net worth and income. I would welcome public thoughts or even a private discussion further as I believe sharing these types of factual examples of successes and failures could be very beneficial when shared with like minded individuals.
As I mentioned, the investment properties are essentially unlevered. I have also been funneling cash ($190k) into storage unit partnerships with a commercial r/e friend of mine and I own a 33% stake in some industrial land and I’m getting ready to buy into a 12.5% stake in development land we want to develop but as you know, that can take a decade to produce financial gain.
So anyway…after 26 years on the corporate rat wheel with a cushy job and 5 weeks paid vacay, pension and 401k benefits, I am trying to decide if I take what will ultimately be a 4 month severance and leave the corporate world for good and stop spending 8-10 hours a week fighting traffic to/from downtown.
Thoughts anyone?
Buckeye,
2 years and one sort-of-finished-pandemic later, and I hope you did it. I hope you quit for good and are now living the entrepreneur lifestyle and soaking it all up! You only get one life and it goes by fast. I hope you enjoy every second of it, but are still a strong person too and stand up for what’s right when times are tough as they have been the last few years – so many of us have gotten focused on comfort and safety and forgotten what is truly important.
But yes I hope you are living it up and enjoying.
Nice comments on importance of owning business I 100% agree with.
But saying your alternate choice was to work 3 years at 14 hours / day for 20% chance to make $25 mm per year is pretty unrealistic. We both know bankers only get paid that much after years and years of relationship building; upside to 3 years as VP/director is low 7 figures at a BB, max. And only if you make it rain big fees for your MD. If your point is that there’s a 20% chance you’d be able to make it to MD to conjure the rainmaking Gods yourself, doesn’t seem fair either.
Not trolling, but keeping us honest so that others don’t fall into 20% at 25 mm trap. To those considering WS: the only people that make that kind of money will never let you get there. That’s the truth.
Thanks.
Chris, I was talking about building Financial Samurai into a bigger business with funding and so forth, not working three years on Wall Street.
See: https://www.financialsamurai.com/can-financial-samurai-be-the-next-billion-dollar-financial-tech-company/
Years later, I’m happy I just got the lifestyle business as I’m not that far away from that Figureand I can see a path to getting there.
That said, how long have you worked on Wall Street and what department are you in? I was compensation nowadays?
Sam, how do you maintain motivation to work so hard on your business knowing that you are already financially independent and will not need the money? Do you try to trick your brain into thinking it’s necessary?
Hi Conrad, it’s actually hard to stop work at once you spend couple decades working for so long. I went from working from about 5:30 AM until 7 PM after college for 13 years, to a whole bunch of free time starting in 2012.
But I have to admit, I finally experience some burn out with full-time parent hood, the online business, and high school coaching. But the funny thing is, Now I feel like I have a lot of free time because high school coaching season just ended! So instead of swinging three bats to hit a ball, I’m only swinging with two bats.
I also think we are genetically wired to try hard for the sake of our little ones once we become parents.
But does it seem like I’m working a lot to you? If so, I appreciate it!