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Personal Finance Tips From the 1 Percent

How the ultra-wealthy can teach us about saving and investing

Jean Brunel likes to joke that he’s not rich enough to be his own client. As the proprietor of Brunel Associates — a personal finance consultancy that caters exclusively to the ultra-rich — Jean only works with families and individuals with at least $100 million in assets.

For perspective, the median net wealth for people nearing retirement age (55 to 64 years old) was $165,700 in 2013, according to an analysis of the Federal Reserve’s Survey of Consumer Finances. Brunel’s clients are wealthier by a magnitude of 603.

You might think people that rich wouldn’t need personal finance guidance, or that they wouldn’t need to bother thinking about how they spend their money. But Brunel says the opposite is true: The filthy rich are actually meticulous financial planners, and they go to great lengths to ensure they remain wealthy — and keep getting wealthier.

Meanwhile, the average American is dreadful at saving. Granted, the 99 percent are at a major disadvantage, since a much greater percentage of their incomes goes toward rent, groceries and other necessary expenses, leaving little left over for saving. Still, 41 percent of Americans don’t have enough money saved to cover a $2,000 emergency expense, and a third say they don’t have any money saved at all, according to data from the Pew Charitable Trusts.

So perhaps we 99 percenters can learn something from the upper echelons. MEL asked Brunel what everyone can learn about personal finance from his clientele.

Set a goal, then work backward from there

As basic as it seems, Brunel says one of the most common personal finance mistakes the average person makes is not setting a goal. Without a definitive goal, a person won’t know how much they need to save in a given month and orient their lives accordingly.

For the rich, this may mean growing their net worth by a given percentage each year. But for the average person, the standard goal is to retire at a reasonable age and maintain their standard of living. The average person, then, should identify the age at which they’d like to retire, how much money they’ll need each month in retirement, and when they’re likely to die. “Find out how much you’ll need so you don’t run out of money before you run out of breath,” Brunel says. That figure will determine how much money you need to put away from each paycheck. “Anyone who can use Excel can figure it out.”

Oh, and don’t plan on being able to live off Social Security in retirement. You’re going to get peanuts from Social Security relative to what you paid in, Brunel says.

Focus on after-tax returns from investments

When it comes to investing in stocks, bonds and other securities, “it’s not what you get, it’s what you get to keep,” Brunel says, meaning you need to know the fees and taxes associated with all your investment decisions. The wealthy stay wealthy in part because they understand taxes and financial fees, and how to pay the least of each.

Mutual funds usually list their pre-tax returns, so ask to see the after-tax returns before choosing one.

Many money management activities are tax-inefficient, Brunel adds. For example, sometimes people will liquidate an asset in order to buy a security, not realizing they might have to pay a capital gains tax on the initial sale. Even if the newly purchased security performs well, the person might still lose money, all told.

He also suggests making use of financial instruments that are tax-free. Parents can “gift” up to $14,000 to their children, tax-free, each year, for instance. “No one is in the tax avoidance business,” Brunel says of himself and his clients. “But we are in the business of avoiding unnecessary taxes.”

Buy mutual funds, not individual stocks

Prior to starting his consulting practice, Brunel worked for JPMorgan Chase for 23 years, serving as chief investment officer of its private bank division for a nine-year stretch. There is no way the average person can compete with the resources of a professional investor, Brunel says, so you’re not going to make a killing buying and selling stocks on Etrade from your basement. Rather, you’ll lose on those bets 65 percent of the time, Brunel says.

“Would you do your own surgery?” he asks. The rich don’t traffic in individual stocks; they buy mutual funds and exchange-traded funds, and invest in hedge and private equity funds.

The latter will be off-limits to the average income-earner, but we all can (and should) invest in mutual funds. Participating in a mutual fund means investing in a collection of stocks, bonds and other investment vehicles. The chance for success with a mutual fund is far greater than playing Gordon Gekko in your free time.

If you follow these steps, Brunel says “you’ll have created a strategy, where there is process and you know why you’re doing what you’re doing, and where you don’t change course.

“You’re imitating what the ultra-affluent do.”