Immigrate to the United States and check out the U.S. Immigration Guide: Media reports often highlight news about many Americans having no savings, creating the illusion that Americans are all living paycheck to paycheck. In reality, this is a classic example of viewing American issues through a Chinese mindset.
First, the starting points for investment and financial management differ between people in China and the United States. The U.S. has a rigorous legal system, especially regarding complex tax laws. The guiding principle for investment and financial management should be to optimize long-term after-tax returns, whereas Chinese people tend to prefer optimizing simple annualized returns.
Another important difference lies in investment channels. Chinese people have relatively fewer investment channels, so financial management primarily refers to bank savings, the stock market, and real estate. In contrast, the U.S. market is relatively mature and standardized, offering a wide variety of investment channels that allow investors to control risks while having numerous choices. By comparison, bank savings are not very attractive.
So, how do Americans invest and manage their finances? I will explain them one by one in order of investment risk, from low to high.
I. Real Estate
Buying a home, especially a primary residence, is the investment choice for most American families. Mortgage rates for primary residences are low, mortgage interest is tax-deductible, and there is a high tax-free allowance for capital gains upon appreciation. Therefore, it has advantages such as low investment requirements, low risk, stable expectations, and the ability to build equity. This has made "buying a home for retirement" a popular investment rule in the U.S. When people get old and can no longer move around, they can choose to mortgage their home to a senior care facility and receive care there until they pass away. Consequently, Americans generally prefer buying homes over saving money.
Official U.S. statistics show that while the average household savings rate is less than 4%, 68% of families own their own homes. Currently, the total value of privately owned real estate in the U.S. has exceeded $9 trillion, far higher than other categories of private assets.
However, it is worth noting that due to high property taxes and agency fees of around 6% of the total property price during closing, the costs of holding and trading homes are implicitly increased. While buying a home for self-residence combined with investment for value preservation (appreciation) is cost-effective, "flipping" houses is relatively difficult.
II. Retirement Funds
In the U.S., there are various retirement investment programs to participate in. Common ones include the 401(k) retirement plan provided by companies for employees, the 401(a) provided by government agencies for employees, and the IRA retirement plan provided by banks for the general public. These funds not only offer tax benefits through tax deferral but also widely adopt the principle of diversified investment, thus resulting in lower risk.
Because they cannot be withdrawn before retirement (early withdrawal incurs penalties), the long-term investment returns are quite substantial. For a middle-class family with an annual income of around $100,000, it is common to have over a million dollars in their retirement fund account after decades of investment. From this perspective, the American habit of not liking to save money is understandable, as their later years are already well-guaranteed.
III. Financial Investment
Stocks, mutual funds, and bonds are the three main financial investment products in the U.S. Among them, stocks carry higher risk but offer higher returns; mutual funds have lower risk and returns than stocks, while bonds have the lowest risk and returns.
Following the diversification principle of "not putting all your eggs in one basket," the popular investment advice from American financial experts is that everyone's investment portfolio should include stocks, mutual funds, and bonds to diversify risk.
When young, one can take more risks, so the proportion of stocks can be higher. After reaching middle age, one should adopt a more conservative investment strategy and increase holdings in mutual funds and bonds. As retirement approaches, the entire portfolio should be dominated by bonds, which is safer.
Among all financial products for wealth management, mutual funds are a popular choice. With over a hundred years of development, they are a very mature mass-market financial product.
Data from the Investment Company Institute shows that currently, about 52% of American families, totaling over 93 million people, hold mutual funds, meaning roughly one in every three Americans is a mutual fund holder.
4. Insurance-based Financial Management
In the eyes of Americans, asset protection is just as important as investment. Fortunately, the U.S. insurance market is very mature and standardized.
Insurance products not only provide various types of insurance in the generally accepted sense, allowing for income-tax-free compensation in the event of family misfortune, but they can also participate in family financial management. Especially for married individuals with families, preparing for emergencies is a very important insurance-based financial tool.
Common insurance products in the U.S. include "permanent life insurance," "term life insurance," "universal life insurance," and "Variable Annuity Insurance."
5. Foreign Exchange Trading
Undoubtedly, the investment risk of foreign exchange trading is very high. However, due to the diversity of currencies in the U.S. and the fact that the U.S. dollar can directly participate in trading, participation in foreign exchange trading is very high in the U.S., whether by professional institutions or individual investors. Its returns mainly depend on exchange rate fluctuations, making it a high-risk, high-return investment method.
The above lists only the main investment channels for Americans. As mentioned at the beginning, there are many investment avenues in the U.S., and financial products are mature and standardized, so it is understandable why Americans do not favor savings deposits.
Although investment and financial management can be done directly by oneself in the U.S., more people choose to hire qualified financial experts to manage them. The traditional fee structure is a commission based on investment returns, but in recent years, it has increasingly shifted towards small annual fees. Generally, there are no threshold restrictions on investment amounts; only a few famous investment experts set minimum investment requirements.