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Friday, October 21, 2016

If rich people have most of their money in stocks and such, where do they get money?

Answer by Bernie Klinder:

Money sitting in cash or near cash (short term investments like 30 day CDs) earns very little interest, so you’re right in assuming most of the wealth is tied up in longer term investments that may not be easy to unravel.

However, the majority of those investments would “throw off” cash on a regular basis. For example, Investors looking to get rich invest primarily in growth stocks hoping the value of the stock goes up over time. Someone who is already rich will invest in a strong stable stock that pays a quarterly dividend, like Proctor & Gamble, Microsoft, GE, etc. Hold 100,000 share of a firm that pays a $4 annual dividend, and you’ll receive $100,000 every 90 days. They would also invest in bonds that pay interest annually, or commercial real estate (shopping mall, apartment building, office building) that would earn rental income.

All of these investments could be set up to pay out to an easily accessible account that can be accessed from an ATM. They also have access to an instant line of credit for binge shopping. For larger purchases (like the million dollar beach house) things can get creative. For example, they might set up an arrangement where they purchase the property on an interest only loan, and then purchase a long term CD (certificate of deposit) at the bank for the same amount as collateral. Then they divert the interest payments from the CD to make the lions share of the payments on the beach house. Hold the house for 10 years, and then sell it when the value of the house increases for a tidy profit. Repeat as required.

The main point is, they try hard to never spend their principal wealth – only the interest earned or dividend income. Often, they don’t even spend all of that. They typically set a budget where they spend about half of the interest income and reinvest the other half. For example, $100 million earning a modest 5%, would yield about $5 million per year in income. If they can scale back a bit and try to make ends meet with just $2.5 million a year (about $200,000 a month) the principal will grow and their annual interest income would steadily increase every year.

Hope this was helpful.

If rich people have most of their money in stocks and such, where do they get money?


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