A high net worth individual (HNWI) is generally considered to be someone who has $1 million or more in investable assets. That includes liquid assets such as cash or cash equivalents.
Someone who has a higher net worth may rely on specialized financial services for money management. For example, they may work with a wealth manager or open accounts at a private bank. In terms of financial planning, the needs of high net worth individuals may include estate planning, investment guidance, and tax management.
Achieving a higher net worth is something that can be done through strategic investing and careful portfolio building. It’s important to keep in mind that those with higher net worth may have access to certain investments that the everyday investor would not. Minimizing liabilities is another part of the wealth-building puzzle, as net worth takes debt into account alongside assets.
What Defines a High Net Worth Individual?
There are different metrics that can be used to determine whether someone falls under the high net worth umbrella. Those can include a person’s:
• Income
• Investable assets
• Total net worth when liabilities are deducted from assets
The Securities and Exchange Commission (SEC) requires registered advisors to provide information about high net worth individuals on Form ADV. Specifically, the form asks advisors to list how many clients they serve who have $750,000 in investable assets or a $1.5 million net worth.
The SEC can also refer to high net worth individuals when discussing accredited investors. An accredited investor is defined as having:
• Earned income of $200,000 or more (or $300,000 for couples) in each of the two prior years, with a reasonable expectation of the same income in future years
• Net worth of over $1 million either alone or with a spouse, excluding the value of a primary residence
Private banks or wealth managers who serve high net worth individuals might choose to define them differently. For example, someone who wants to open an account with a private bank might need to have $5 million or $10 million in investable assets to qualify. Someone who has that much in assets may be relabeled as “very high net worth” instead. And at higher levels of assets, they enter the realm of ultra high net worth.
Recommended: What’s the Difference Between Income and Net Worth?
How Is Net Worth Calculated?
Wondering how to find net worth? It’s a relatively simple calculation. There are three steps for calculating net worth:
1. Add up assets. These can include:
◦ Bank account balances, including checking, savings, and certificates of deposit
◦ Retirement accounts
◦ Property, such as real estate or vehicles
◦ Collectibles or antiques
◦ Businesses someone owns
2. Add up liabilities. Liabilities are debts owed. For example, a home’s value can be considered an asset for net worth calculations. But if there’s a mortgage owing on it, that amount has to be entered into the liabilities column.
3. Subtract liabilities from assets. The remaining amount is an individual’s net worth.
Net worth can be a positive or negative number, depending on how much someone has in assets versus what they owe in liabilities.
Net Worth vs Liquid Net Worth
In simple terms, net worth is the difference between assets and liabilities. Liquid net worth, on the other hand, is the difference between liquid assets and liabilities. A liquid asset is one that can easily be sold or used to invest. So cash in a savings account is an example of a liquid asset while investments in a real estate investment trust (REIT) would be illiquid since they can’t be sold at short notice.
What Is an Ultra High Net Worth Individual?
Someone who fits the definition of an ultra high net worth individual (UHNWI) generally has personal financial holdings or assets of $30 million or more. People who are considered to be ultra high net worth individuals are among the top 1% wealthiest in the world.
So what is the net worth of the top 1%?
According to a report from Knight Frank , the typical net worth of the 1% falls far below the $30 million in assets required for ultra high net worth status. For example, in the U.S. someone would need $4 million in wealth to join the ranks of the top 1%. They’d need $7.9 million to belong to the top 1% in Monaco.
But what about the top 0.1%? Again, the level of wealth needed to qualify is still below the $30 million cutoff required for an UHNWI. In the U.S., you’d need $25.1 million to be considered part of the 0.1%. This is the highest amount of assets needed to qualify among the countries included in Knight Frank’s research.
How to Get a Higher Net Worth
Reaching high net worth status can be a lofty goal but it’s one many HENRYs — high earner not rich yet — work toward. The typical HENRY makes most or all of their income from working. While they may earn an above-average income, they may not have sufficient disposable income to start building wealth to increase their net worth.
There are, however, some ways to change that. For example, someone who earns a higher income but doesn’t have the higher net worth to reflect it may consider things like:
• Paying off student loans or other debts
• Relocating to a less expensive area to reduce their cost of living
• Rethinking their tax strategy so they’re able to keep more of their income
• Finding ways to increase income, either actively or passively
Recommended: 39 Ways to Earn Passive Income Streams
Coming up with a solid investment strategy is also important for boosting net worth. That includes diversifying to manage risk while investing in assets that are designed to produce income. For example, that might include:
• Purchasing shares of dividend stocks
• Enrolling in a dividend reinvestment plan (DRIP)
• Buying dividend exchange-traded funds (ETFs)
• Investing in REITs or real estate mutual funds
Creating multiple streams of income with investments or starting a side hustle while also reducing liabilities can help with making progress toward a higher net worth. At the same time, it’s also important to take advantage of wealth-building assets you may already have on hand.
For example, if you have access to a 401(k) or similar plan at work, then making contributions can be an easy way to increase net worth. If your employer offers a company matching contribution you could use that free money to help build wealth.
The Takeaway
High net worth individuals are typically described as people who have $1 million or more in investable assets. Those with more than $5 to 10 million in investable assets may be labeled as “very high net worth”, and those with more than $30 million are generally considered ultra high net worth individuals.
Individuals with a higher net worth often consider time to be an asset in itself. The thinking goes, the sooner you begin investing, the more time you have to benefit from the power of compounding interest.
When you’re ready to invest, SoFi Invest® can get you started. You can open an investment account today to enjoy low-cost trading while creating a diversified portfolio that fits your needs.
Photo credit: iStock/Cecilie_Arcurs
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