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DECEMBER 15, 2003

STREET WISE
By Amey Stone

Getting Rich -- And Staying That Way

The first part may be a lot easier than the second. If you're accumulating wealth now, here's what you better do to hang onto it

With reality shows like Paris Hilton's The Simple Life and MTV's Rich Girls drawing attention to the high-crass wealthy, it's a perplexing conundrum for those of us who haven't achieved independent means: Just how do the rich manage to stay that way?

Of course, many don't. Plenty of celebrity cases -- Michael Jackson comes to mind lately -- are reminders of how surprisingly easy it is to blow large sums of money. The stock-market millions of so many dot-com investors that evaporated even quicker than they materialized are further testament to the fact that it may actually be easier to get rich than it is to stay rich.

Yet many Americans' fortunes are now turning up (if not exactly amounting to fortunes yet), thanks to the rising stock market, grudgingly improving job market, and Bush Administration tax cuts. So this is a good time to take a look at the habits of the rich (and usually not so famous) families who manage to stay that way over generations. If you want to join them, here are some rules to follow:

1) Focus on assets, not income: Accumulating wealth entails not just making a lot of money but investing your income in things that get more valuable over time. Most obviously, that means putting your money in stocks and bonds and real estate.

This general rule is particularly true during the current economic recovery since income growth is lagging behind corporate profit growth (which translates into stock-price gains) much more than in past recoveries, according to a Dec. 3 study from the Economic Policy Institute. So, if you're feeling richer these days, it's probably because you own stocks, not because you got a big raise.

This rule also has current applications during the holidays. If you want to buy your spouse a really nice gift, you should pick out something that's high quality, lasting, and might even gain in value, such as jewelry, fine furniture, and art.

"One of the secrets of getting rich and staying rich is substituting investment for spending," says Don Luskin, chief investment strategist of research boutique Trend Macrolytics who's working on a book titled The Conspiracy to Keep You Poor and Stupid. "You can still buy luxury goods, but make them ones with tangible and potentially increasing value."

Here's a general guideline to keep in mind: If it costs more than $1,000, and it's not something that could potentially be passed down to a future generation, don't buy it. That means not putting a flat-screen TV under the Christmas tree this year.

2) Don't dip into capital: "Huh?" you may well ask. What this rule means is that once you invest some money, consider that stash untouchable. All you get to do is live off the income. Even if times get tough, you should scale back your lifestyle before you touch the principal. That way it will always be there to keep producing income.

Another key facet of this rule: Never dip into capital to invest in a risky new startup or some other money-making scheme. "People who aren't rich and want to get rich have to take risks," says Luskin. "If you're born wealthy and don't take risks, then it's no great trick to stay rich."

This idea of living off current income may not sound like much fun, but it's the key for families hanging onto wealth over generations. (It's also one reason new rules reducing the taxation of dividends are such a boon to the wealthy.) Confused? Go back and reread some Jane Austen novels, and you'll get the picture: Those gals knew that the real worth of a fortune was in the amount of income it generated each year.

3) Pay attention to taxes: It's one of the great truisms in life: Meet a rich person, and you'll find someone obsessed with taxes. Sure, the rich do pay a lot of money in taxes, but they actually fork over a much smaller percentage of their wealth each year than the average working stiff (again, they can thank the Bush Administration for more help here). Still, it's not by accident. They work at it.

Lately the wealthy are spending a lot less time trying to figure out how to cut their estate taxes -- and more time worrying about property taxes and other state fee hikes. That's because estate taxes are in the process of being temporarily phased out over the next 10 years (and may be phased out permanently after that). Meantime, property values are skyrocketing, which means higher real estate taxes. At the same time, cash-strapped states and towns are raising all sorts of fees on residents. Here's a tip: A lot more vacation properties may be on the market soon.

4) Get good financial advice: One way to stay rich is to delegate financial management to trusted experts. They'll do things like diversify your investments and reduce risk -- all those things you didn't do when you were making the money but that you need to do now if you want to be sure of holding onto it.

A lot of 1990s' day-traders had to go back to desk jobs as a result of not following this rule. "Now that the market is doing well, you may fool yourself into thinking you can manage your own money again," says Randy Scritchfield, a financial planner in Montgomery County, Md., and a member of the MDRT (Million-Dollar Round Table), an association of high-earning financial planners. "But if you're human, you'll use emotion and make bad decisions about very rational things."

Getting good legal and tax advice also helps the rich hold onto their assets through future generations. Here's another truism to ponder: "When you have someone who has built up an estate, their progeny is typically going to do the opposite," says Scritchfield. But usually the third generation reverts back to the wiser habits of the first.

"Trusts are a way to sort of get you through that spendthrift generation and on to the next one." That means if you've got more than a few million to leave to your heirs, you might want to set up a trust that will parcel out the money over time, estate taxes or not.

5) Don't get bad financial advice: This corollary to the previous rule is equally important. Wonder how celebrities lose their riches? Typically, it's at least partly because they got bad financial advice.

"Once you're rich, it's like a game of Chutes and Ladders," says Luskin. "You have to watch out for the chutes" -- like falling under the spell of a financial adviser who's either unscrupulous or incompetent. "One thing the people who stay rich figure out is how to pick these guys."

6) Invest in your kids' education: It's still possible in this country -- although very rare -- to get rich without having a good education. But staying rich is much, much harder without one.

Education offers lots of important intangible benefits for both getting ahead and learning to appreciate it when you do. But cynical as it may sound, at the top rungs of the societal ladder, a real dollars-and-cents value also adheres to not only attaining an advanced degree or two but also attending the best in private schools.

"One of the ways the rich stay rich is making sure their kids go to school with other rich people so they get networked in," says Luskin. That means they get invited on ski trips to Aspen with boarding school chums as well as get hired at white-shoe investment banks once they graduate from the Ivy League. "The real purpose of a Harvard education is to meet other people who have Harvard educations," says Luskin.

So send your kids to private schools or at least to public schools in the best neighborhoods. Make sure they study hard, and then ante up for the best in private colleges. It may seem like that's a quick way to the poorhouse. But think of it like a good insurance policy. That way, even if you don't manage to hang onto your fortune, your kids will have built up one of their own and can support you in the manner to which you're accustomed by the time you're ready to retire.




Stone is a senior writer at BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column
Edited by Beth Belton

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