What is the Capitalist Class?
The 2011 Occupy Movement brought the nation's attention to the top one percent of income earners. Protestors said, "we are the 99%," as they sparked a...
The 2011 Occupy Movement brought the nation's attention to the top one percent of income earners. Protestors said, "we are the 99%," as they sparked a fierce debate on income equality that continues to this day. More recent Black Lives Matter demonstrations further emphasized the disparities between high-income and low-income households.
While most of us will never earn the roughly $500,000 per year to join them, we can learn from the financial habits and investment strategies that vaulted the roughly 3.3 million Americans that make up the top one percent.
The term "capitalist class" is sometimes more focused on business owners and executives, such as the famous tech CEOs and other titans of industry who have become household names. However, even if the top 1% of wealth isn't within reach, you can benefit from many of the same practices and improve your own financial future.
How Does the Capitalist Class Make Money?
While the capitalist class may work hard to continue growing their wealth and income, they likely don't work the typical 40-hour workweek. Instead, they earn income from diverse sources, including investments and business ownership.
The capitalist class doesn't keep the majority of their assets in low-interest savings accounts or checking accounts that pay less than one percent interest. So while high-yield savings accounts are a good place to park your emergency fund or down payment savings, funds allocated to longer-term goals like retirement or sending your kids to college should likely be invested in the stock market.
Wealthy business founders like Elon Musk and Jeff Bezos sometimes earn billions of dollars in a single day, but that doesn't come from a regular paycheck. Instead, just like investment guru Warren Buffett, most of their wealth is invested in the stock market.
What you can learn: It's important to keep cash savings for short-term and emergency needs, but it's wise to invest a portion of your income in the stock market.
Savvy investors and business leaders may sometimes chase short-term gains on the stock market or a one-time deal, but they typically have a longer-term focus when it comes to investing. The capitalist class looks for assets that will grow in value and provide a cash flow at the same time. That's a win-win for their money.
While most of us don't have the money lying around to create a new multi-billion dollar business from scratch, we can buy shares of stock or other investments that pay us dividends for life. If you can, you may even be able to buy an investment property to make money when someone else pays you rent.
What you can learn: Instead of chasing short-term opportunities and hourly work, look for ways to earn long-term cash flows from a one-time investment.
Diverse Income Sources and Assets
While some founders are heavily invested in a single stock because they literally started the company, most wealthy households look to diversify their income sources and assets. Hedge fund and private equity managers don't go all-in on a single investment. Instead, they buy a portfolio of investments to lower risk and seek new income-generating opportunities.
You may not be able to buy ten businesses outright like a major Wall Street investment fund, but you can build your own portfolio of ten stocks or buy income-generating high dividend yield investment funds. As your wealth grows, you can look to alternate investment classes that bear more risk, such as real estate, cryptocurrencies, and investments in smaller, riskier stocks.
What you can learn: Don't put all of your investments in one basket. Buy a diverse portfolio of stocks, funds, and alternative investments that balance your risk tolerance and investment goals.
One of the best ways to make money is while you're sleeping or doing anything but work. Dividends are not the only way to earn passive income. Capitalist class members often start businesses that generate passive revenue or get paid for someone else's work. When you're the boss, you get to keep all of the profits.
Again, this brings us back to investments. Over a long period of time, a diverse investment in the S&P 500 has returned about 10% per year. The consistent long-term focus helps wealthy families continue to grow and maintain their wealth.
What you can learn: Find a good financial planner and get your money invested in a place where you can earn some money that you don’t have to invest in actual “sitting at your desk” time. Make money while you sleep.
In addition to the real estate and stock market investments that we've already discussed, you can earn passive income from starting your own business. Perhaps you want to start an online drop shipping business or buy a laundromat or car wash that can operate on its own online or with a staff you hire. As author Chris Guillebeau explores in his book The $100 Startup, you can start many small businesses with $1,000 or less.
I'm lucky enough to be related to a very successful retired CEO and once asked him about his secret to his career and business success. He told me that the first step was to be "selling something or making something." Then, you have to find a way to make it scale.
In Rich Like Them, author Ryan D'Agostino knocked on doors in America's richest zip codes and found that many of the wealthiest Americans outside of the top 1% owned their own successful small businesses or found success building their own real estate empires, among other business models.
What you can learn: Look for investments or businesses that generate income without your direct involvement. Online businesses and existing businesses are often a good place to start for new business owners.
Does the Capitalist Class Pay Taxes?
This is an interesting question. In general, yes, the capitalist class pays taxes. However, they often use business and investment tax-saving strategies to lower their bills to Uncle Sam. For example, former President Donald Trump's 2016 and 2017 tax returns show that he paid just $750 per year despite millions in income. Warren Buffett isn't shy to say that he believes the tax system is flawed as he pays a lower effective tax rate than his secretary.
Lower Your Taxes
To capture lower tax bills, wealthy families and business owners look to capture capital losses and business losses on their taxes. They also prefer to earn investment capital gains, which are taxed at a lower rate than regular income.
In addition to paying close attention to any deductions or credits you may qualify for, consider upgrading your investments to take advantage of tools like automated tax-loss harvesting. This strategy takes advantage of market fluctuations to lower your tax bill. Of course, there's nothing wrong with taking advantage of legal methods to lower your taxes.
Can Anyone be in the Capitalist Class?
By definition, only 1% of people will ever be in the top 1%. But that doesn't mean we can't learn and work to become rich — or at least richer than we are now. But we can think like the rich and build our wealth over time using the same long-term financial strategies.
While he may not have actually said the words, there's a famous quote attributed to Albert Einstein: "Compound interest is the eighth wonder of the world. He who understands it earns it — he who doesn’t — pays it."
It's important to take the time to understand your money and how it can help you achieve your long-term goals. Don't blame your money for holding you back from the lifestyle you want. Instead, learn to put your money to work for you.
The Bottom Line
We live in a time of immense wealth and income inequality. In the United States, the top 20 percent earn about $254,000 per year, while the bottom 20 percent earn just $15,000. If you don't make a six-figure income, however, you shouldn't feel down. Most of us will never join the top 1% and possibly not the top 20 percent. But we can raise our fortunes with good work, good luck and good planning.
Using a capital class mindset, we can build our income and wealth using the same methods as those who have seen the most success. If you play your long-term financial cards right, you should see your wealth begin to grow in the years and decades ahead.
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