By - Superman081081
>I have a business friend who even had to take out a large loan to pay rent, groceries, etc due to no cash on hand.
lmao your friend if fucking broke dude.
Definitely. The friend is not that successful. Everyday expenses (3-6-9 months of it) should be covered by some readily available cash. With plenty of other liquid assets if necessary.
Getting a loan to pay a tax bill with a cheap line of credit is fine (I got 2.25% last year). But anything above that means the person could easily be forced to sell at major losses if things don’t go their way.
At trying to maximize return, the unknowing investor loses his hat by centralizing his assets in equity
I feel attacked
He probably has crypto in FTX. Correction "had" crypto in FTX.
There is a thing called pledged Asset line. Instead of selling their stock position paying 38% tax, they would borrow money against their own asset at rate of 1% to 5%
Good answer, wealthy always looking at minimizing taxes.
The wealthy has more ways to minimize taxes, majority prolly pays a lower percentage tax rate then the median wage earners.
How is it political to say the wealthy pay lower taxes?
This isn't as unheard of for the extremely wealthy as you think.
There are tax advantages to borrowing against your assets instead of selling them.
That said it's not really a common strategy for the 'common multi-millionaire'
Portfolio backed lines of credit start to become available as an option at modest interest rates once you get over the $1M line. You can use margin before that, but the interest rates become problematic for any kind of practical regular use.
But the higher the portfolio balance, the lower the interest rates for LoCs since your holdings are serving as collateral.
At a certain point you can get interest rates low enough that returns on your holdings will likely exceed the borrowing cost and balance, which essentially means you can freely access your capital without triggering any taxable events (since accessing the LoC isn't a taxable event).
Actually a lot of wealthy people take loans for living expenses. This allows their money to grow at a rate faster than what they’re paying in interest. Even more important, when they die their heirs can inherit the investments, thereby avoid capital gains taxes.
While true, it's not exactly common. And the "pay rent" part sets off my bullshit meter. Wealthy people can negotiate paying upfront for reduced rates or find another way to get better payment terms. I'm skeptical why they're renting their primary residence in the first place as the comment implies.
I think it's much more likely they're just overextended which is not the same thing as being rich.
The only wealthy people that “rent” are “renting” from their LLC or trust that owns the building. That, or for some reason they live somewhere without homestead laws and want to protect themselves from being a target for litigation.
There is virtually no reason, other than maybe living somewhere short term when a wealthy person would actually rent instead of own.
There are tons of Bay Area/NYC people with NW over a couple million renting.
One could argue those people aren't actually wealthy in those areas I suppose.
Unless they are living there short term these people are rich, but not wealthy. Even at today’s mortgage rates it makes no sense to rent when you can pay less by buying. $700k condo in SF financed today on a 30-year has a cost of $5,300/month. Renting that same condo would be mid $6k a month. So you throw away $1,000 a month (not to mention upside equity) by renting.
That’s simply voodoo logic.
Wealth is not one pot of money- it’s multiple pots and cash flow.
Taking loans to pay for groceries, daily expenses is a cash flow problem. I say fix your budget..
If he is saying loans and meaning cc, that’s a different situation. They may be capitalizing on a reward system or churning. But a straight up loan for groceries… that’s a head scratcher!
Some rich people do not really have a solid cashflow as the money stays in their company to avoid distributions at a high tax rate. Avoiding cashflows and not selling stocks is how many Millionaires/billionaires avoid paying income tax.
If he pays rent, he’s poor. Zero chance this guy invests all of his income, and then pays interest on his spending money or cash on hand. Either he has zero income, in which case he has a large degree of risk and should not be taking loans against it, or he’s lying and he’s actually poor. Does your friend drive a Honda Civic or does he rent a new car every few weeks
> I've always heard that most truly wealthy people don't have tons of cash on hand
In relative to their net wealth terms? Absolutely. In absolute, nominal terms? Completely untrue. Maybe only a small percentage of the really wealthy individuals' net worth is in cash but it still positively correlates with net worth.
Ex. Person worth $100k may have $30k on hand which is 30% of their net worth and the person worth $1 million may have $100k on hand which is 10% of their net worth. The lower net worth individual has a higher percentage net worth in cash but in absolute terms he is still poorer than the millionaire.
The above is just a generalization. Percentages will be different and it isn't a guarantee the person worth $1 million will have more cash than the person worth $100k but it is generally true.
Exactly. I have 1-3% of NW in cash available, but the represents 6-12 months of expenses. Plus much more liquidity if needed.
I would say on average most wealthy people have a large portion of their money invested, yes. Cash, especially right now with high inflation, technically loses money. Some wealthy folks may have a lot of cash on hand, but it's likely waiting to be deployed into some type of asset. I'm by no means a mutli-millionaire, but I sold a property this year and did pretty well. I have a large portion of the proceeds in an account and it's slowly being deployed into various investments over the course of the year, as an example. Once deployed I'll keep a 6 month emergency fund on hand, but the rest will be invested into various accounts/funds, etc.
Some people have increased cash allocation % of portfolio because of recent market declines.
I wouldn't go that far, gotta have at least some cash on hand.
Cash only loses to inflation when it's cash used for living expenses
Anything beyond that benefits from inflation, because things like stocks and other assets get cheaper.
This. Stock market downturns in a recession are only bad if you have to sell off assets (ie, tap into your 401k) to cover living expenses. Otherwise it's an incredible buying opportunity.
Inflation increases the price of assets.
What you’re seeing in the market now is more of a result of interest rate, not inflation.
Inflation decreases the price of assets as it pushes interest rates higher. Interest rates increasing is a consequence of a high inflation environment.
This is very incorrect.
I see, that explains it! Thank you
This guy invests!
Net worth above 10m (based on your other comments) and taking out loans to pay for groceries?
No way. I don't believe it.
Probably leveraged on real estate and he's not subtracting his debt from his net worth (hence the 10 million).
Most of the ultra rich borrow against their assets to pay for their living expense at extremely low interest rates. This allows them to claim 0 to no income for the year and therefore no income tax charges
And avoid capital gains as their heirs inherit the funds.
don't they have to make money to pay back the loan they borrowed against their assets?
Generally not, normally with stock you can borrow against some percent of your assets and the interest just gets added to the total loan amount, for example if I had 100m in Apple stock, and I wanted to borrow 10 million I would go to a bank and they would quote me a percent interest for a loan with Apple stock as collateral, but since the loan is secured with something very liquid the bank doesn’t mind just adding the internet to the total loan amount with no monthly payment amount ever needed. When you die the bank is entitled to assets in the amount of the final loan amount. This also means you never sell the assets so no capital gains taxes to be paid.
(That’s my understanding anyways, I’m not a tax professional nor am I super rich so I *may have some parts of this* a little bit confused lol)
This is exactly right.
the “never repay” part is very weird to me
i think it’s like a 2% interest loan and stocks go up 10% so you can just sell stocks to pay the loan?
idk, i don’t know how people with $50m in equities take an SBLOC for $10m @ 2%, live off of it/spend it, never repay the $10m? doesn’t add up/makes no sense
Your estate repays the loan after you are dead, it not that it never gets repaid, just YOU don’t do it because you are dead.
To be clear, you don’t sell stocks so you can avoid paying taxes on the sale. That’s the most important part of this strategy is it allows people to pay 0 taxes on the 10 mil rather than the cap gains rate.
I'm with you. Except, if "loans" are just massive credit card debts.
PS: "massive" for a normal person. For a wealthy person, credit cards can easily run upto $100000s
zero-cost collar on the assets, then take out pledged asset line at low rate, live on the loan.
I heard some stories (of questionable veracity) about people putting groceries on Klarna and other buy now/pay later services because there was no interest.
It is a pretty common scam for people to claim to be very rich BUT illiquid. Do not give this person a dime even if they promise a 10k tip for helping them.
I don’t know that it is a scam because someone is asset rich and cash poor. Farmers are almost all millionaires but tight on cash.
Watch the Tinder Swindler to see what I’m talking about, it was great.
Coming from pre-covid responses from a few wealthy people I met:
They use investments as collateral against loans with a 1-3% interest rate.
Example: 10 million $ invested in a stable, blue chip stock. Go to brokerage and ask for a 1 million $ loan, at 1.5% interest and use your 10 mil stock as collateral.
If you wanted to get cash of 1 million from the 10 million stock, you'd have to sell 2+ million worth due to taxes. So you can get 1 million cash and be down to 8 million in stock, losing 1 million to taxes, or you could keep all 10 million in stock AND gain 1 million cash with just a 1-2% interest rate.
Once you're wealthy, gaining wealth is such a snowball effect, it's ridiculous.
>with a 1-3% interest rate.
No matter what your collateral why would a bank lend you at a lower rate than they can get from the Federal gov't? What you're saying makes no sense in 2022. Maybe two years ago ...
Because he is bsing. You get a loan more like at fed rate.
Financial advisor here. You're correct, for "average" rich people. Let's say 5-20mm. They're getting variable rate LOCs, lower than the bank would give, but not THAT low. Truly rich clients? Yes, they can secure privately negotiated LOC rates, as the firm would rather lose a bit of money on interest than see 100m+ in outflows if the client finds a better rate elsewhere.
You are right, it was true when rates were lower. My understand is that the rates were LIBOR + a small % premium.
LIBOR today for a margin loan is 5.75% and 1 year ago it was 2%:
Yes, I work in wealth Mgmt and this is the "loan" people are criticising. This product is very popular. It's a whole different ball game when you're rich.
What sort of wealth do you need to access such loans?
1m+ in liquid assets
Appreciate the info. Stock/bonds/cash etc I take it. Would a 401k be considered liquid enough for collateral or do the investments need to be set apart?
I work in another area so don't know the full details, but within our company the collateral is the client's liquid investments that we manage. Primarily easy to liquidate assets such as govt bonds.
Good to know. I'm not at 1 Milly yet but I likely will be in 10 years or less. Interesting to think I could borrow money at sub 2 percent and make 10 or more.
I appreciate all of the info.
The purpose of these loans is not to stick more money into the stock market. It's to make big purchases like house, car, wedding,.etc without having to liquidate your financial assets incurring taxes.
That makes sense. I guess that's not what I was saying even if I didn't articulate things the best manner. I was just thinking that you could take out 10% of your portfolio for a loan, and still be relatively at ease that you will make that back in a somewhat expedient manner.
You typically can't collateralize a retirement account.
Most wealthy people are not 100% or levered > 100% into risky investments. They have some bonds.
What you described would be considered on the high risk end, being more than 100% in equity. Eventually they have to pay back that loan by selling something, and is losing the interest every month. Today there is no 1-3% interest rate, the floor is set by T-bills which are now 4%, so that would be a 5-6% margin loan. So paying that loan back is 5-6% risk-free investment, without tax. There is no equivalent investment available in the public markets.
A wealthy person may have lots of equity which they are prohibited from selling, (e.g. CEO grants), and so taking a loan out for expenses is reasonable, but selling and repaying that loan (taking interest) is the better strategy usually. The loan does permit them to sell when they think is an optimal time, and not when they want the money.
have cash buy stocks use them as collateral buy houses with the loan buy your debt from bank or change the collateral to the houses then take another loan using your stocks as collateral and repeat
Your business friend is three children in a trench coat.
Don’t be sad. Good horsey
Most of the money held by the rich are tied up in investments of various varieties. By and large, they aren’t sitting on a tower of cash like Scrooge McDuck. They’ve got a 50, 60, 100k in their checking accounts and cash on hand. The rest is busy working for them making more money.
Think of Elon Musk. Sure, he likely has more cash on hand than most will see in a year, but the vast majority of his wealth is in stocks.
Elon does what a lot of people with billions of dollars of stock do - they leverage it to borrow cash or establish a line of credit that covers living expenses. They sell only small amounts of stock at a time to pay off the principal and interest. The gains are taxed at long term capital gains rates, which are always favorable to regular income tax rates. It keeps your taxable as low as possible.
These types of loans have low interest rates, they are basically mortgages. I don't know how feasible this is with the increase of rates and the decline in stocks, but it's a pretty common strategy.
If you google it, you'll find tons of results. Specifically, I remember reading that Musk has something like a $3.4B line of credit with one of the bigger banks.
Another common way of legally avoiding taxes is receive income directly to an LLC or corporate entity, because businesses are taxed on their net, whereas individuals are taxed on their gross. The business owner pays themselves a smaller amount, which is taxed at the individual level and the business entity can use the remaining income in non-taxable ways that still enriches the owner.
I mention it because people with a lot wealth don't usually have relatively large amounts of cash available. There are more tax-efficient ways of managing it that reduces their liability.
> has more cash on hand than most will see in year
More like in their lives 😆 the man was recently worth $200,000,000,000+, so having $50,000,000 on hand is literally a negligible rounding error. It would be like owning a $200,000 house and having $50 in your pocket
If his companies don't do well then it becomes less of a rounding error
$50 gets me the same shit as it gets elon. there's no reason for anyone to have a million dollars in cash just laying around for no reason, no matter how rich they are
Yes but what you buy "casually" with your $50 is not the same thing as what Musk "casually" buys with his $1M
really missing the point of why i responded to someone asserting that it was anywhere near reasonable for someone to have 50m on hand
i brought it down to 1m because while i’m not sure how rich people work, i still don’t think they’re keeping a million dollars in their wallet on the off chance they want to blow it on any particular day. i would assume a loan is more likely
You forget these people fly around daily first class, stay at 5-star hotels, eat at fancy restaurants for lunch etc. Their pocket money lifestyle is what most people could dream of having as a holiday trip.
Need to update that math, $200,000 home is damn near starter home prices, even outside of metro centers.
Great point. Makes sense
I’m moderately wealthy and keep $10-30k in my checking account and 10-20% of my portfolio in cash and tbills or other short term securities.
I'm moderately poor, but I have been purchasing I-bonds each month the entire year (were paying 9.62% the first half of the year, now 6.89%). They are liquid after 1 yr, and staggering them month by month gives you the ability in the future to tap into it for unexpected expenses or when a better investment opportunity comes your way. The downside is the $10k limit per year, but in my case it has helped take some sting out of inflation.
Any reason you don't keep the 10-30 in a quick access savings account like capital one? They have 3% apy
Monthly expenses are around $10k, so I need at least that amount in there to cover.
Your "business friend" is not a multi-millionaire if he had to take out a loan to buy groceries. He's lying to you.
Your “business friend” is almost certainly not rich, but he probably wants people to think he is.
Taking out a loan to pay for essentials. Absolutely insane, and anathema to anyone with any understanding or experience with money.
My guess is than he has money in some sort of investment that he thinks is going to earn him a great return. So instead of taking ~$3000 out of his investment to pay for essentials this month, he’s taking a ~$3000 loan. As long as the return of the investment is more than the money lost to interest on the loan, he will have made a good choice.
Of course it is probably a dumb move because investments are never a guarantee, and if it goes bad for him he’ll lose money on the loan and not make enough from the investment to make it worth his while.
That’s a terrible move, and a short cut to poverty. That’s not something wealthy people would ever consider as a sane option.
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Google “buy, borrow, die”
Unless he left out that he took the loan from himself. Say you own a company, and its taxed as a corporation. Its sitting on some cash it already paid the corporate income rate on. You can pay yourself and take that big tax hit. Or you can take out a loan from your own company, have no tax hit, and just make interest payments back to the company.
That’s not “taking out a loan” - at least, it’s not what anyone with a financial or business background would call it. That’s a DLA, or Director’s Loan Account. While it uses the word ‘loan’, it’s actually just a fancy phrase for taking cash out of your business. You never have to pay it back, you just need to account for it later (and if you have a positive DLA balance there is no tax liability either).
No, you can very much just sign a promissory note to the business and it is in all regards a loan as long as you make payments.
That's exactly what I've done.
The point was you don't know the truth behind his statement. I to could say "I took out a loan just to buy groceries!". Technically I'm being truthful
Yeah of course, none of us knows the truth behind this. All I’m saying is that no business-minded person I know (and I know a lot of them) would phrase this as “taking out a loan”.
I don’t think you can generalize. Your business friend may be wealthy on paper, but if most of his assets are illiquid or otherwise locked up, he could be cash poor.
There are many levels of wealthy, and many different kinds of people at each level. Wealthy people are not all smart, or stupid, or hard working, or lazy, or anything else you can think of except wealthy.
I'm sure that in absolute terms almost all wealthy people have more cash and cashlike assets available than almost all poor people, but that's not saying much. As a proportion of their assets, probably the majority of them don't have much in cash, but that's true of most middle class people as well.
I don't think you can say much about "most" wealthy people.
Nah, it is rather easy to free up some cash in a day or two. Sure money is invested, but some of it is easily freed and if more is needed it works as collateral for the money that is needed. Also most wealthy people have good relations with banks to get fast access to credit when needed.
Neither new nor old money get wealthy by holding cash. Cash is very expensive to have (and while inflation first comes to mind, opportunity cost is the real cost here).
If you spend some time on the Forbes' list, you will quickly notice that most wealth are valued from one's holdings in a business; nobody just "came across a billion dollar", they've held equity in a business, and that equity is worth millions or more. But they also scarcely have the opportunity to exchange that equity for cash, and they surely have little incentive to do so; after all, that very equity will make their next million, so cashing out even a few thousands can have a very high compounded cost.
Loans on the other hand are a very cheap way to get cash, for transactions that require it.
Ahhh that makes sense. By the comments I'm receiving, I guess a lot people don't know this (neither did I though)
It really depends on what those people do, how they make/made their money, and how they live. Most people who are rich due to ownership of a single company will have a huge portion of their wealth tied up in the company, and they may not receive sufficient dividends to pay for living expenses. However, to say that most wealthy people dont have cash is trying to generalize too large of a population. Note that the reason wealthy people are able to go without cash is that banks are very willing to provide them with cheap credit in order to retain their business, and because the wealthy people have collateral, thus making the credit low risk.
No need to keep more than 6 months expenses in emergency fund and $25k working capital
I’ve heard a lot of stories from people that they “know a guy” who is rich, super successful, whatever. Anytime someone is talking about a 3rd person like that, they only know what that person wanted them to hear or see— a glossed over version or a fictitious situation.
Your friend is an idiot. Most of wealthy folks
Money is invested, however, they always have enough money on hand to take care of their expenses.
Is very important to take care of all the expenses so that you know where your money are going.
It depends a lot on how they made their money. Lots of the truly wealthy made it through their own businesses, so 90+% of their wealth is tied up in their business, making it quite illiquid.
Elon Musk is a great contemporary example, he had to borrow loads of cash to buy Twitter, even though he is one of the richest people on the planet.
For people that inherited it or from "getting lucky" somehow, it just depends.
Twitter is not the rent, groceries, utilities, phone plan. Elon had to sell a bunch of TSLA shares to make it happen too.
>had to take out a large loan to pay rent, groceries, etc due to no cash on hand.
Does he happen to have all his money at FTX?
They don’t use cash and most expenses go on their black Amex so the accountant can review the purchase. They just assume the card gets paid off on time.
lol asking us broke mfs about being wealthy.
No, not true at all 😆
If he has to borrow money for daily expenses, he’s not handling his money well. He‘s over invested and gambling his future.
Tricky opinion. They have cash but not all cash.
They keep to be invested because a simple rule:
- you get taxed only when and if you sell.
In example I own very valuable expensive artworks that increased in value I would sell them in 100 years only if needed.
Ahhhh I like that. IF YOU SELL!! Agreed
yep that’s all, you pay 27% on any profit but there are dudes that made million dollars of profits, so the less you move everything all the time the better.
then there is the MAGIC rule of compound interest that for me is the strongest drug in the world, when you try it you rarely sell anything
How do you find a buyer for your artwork?
probably because is made from a top5 world artist? Could sell it in one hour now, can do the same in 100 years (likely).
As with all things this is relative. I'm by no means rich, but I keep about 200 in cash.
If a multimillionaire or billionaire kept a few 100k in a house safe I'd be unsurprised by it. Likely some in physical and some in a trading/ checking account
Sounds like your friend is overleveraged, a liar, or both. Either way, don't take financial advice from him.
That sounds pretty dumb. I have plenty of cash in my checking and savings account for basic every day bills.
So, no, that’s not true at all.
Everyone is leveraged to the hilt
True wealth is friends, family and animals that love you, and all of your needs (read: needs) comfortably met
Some people are so poor, all they have is money
You sound underaged, OP
What does it mean to be a millionaire? I think people would classify it differently depending on circumstances.
Sure you can run a business and have lots of assets, but if you have crazy amounts of debt because you don't have money on hand, I wouldn't consider you "wealthy"
Great point. His net worth is above 10 mil.
Net worth in what? Assets like stocks?
I would consider myself moderately wealthy, I have 140k in cash on hand in case of an emergency.
Could be an example of somebody using the “[buy borrow die](https://www.wsj.com/articles/buy-borrow-die-how-rich-americans-live-off-their-paper-wealth-11625909583)” strategy
Could you elaborate on this matter? It's interesting. I've read about it but it doesn't really quite make sense to me. Is it beneficial or is it not that beneficial to some?
Sure, the gist of it is:
1. Invest the vast majority of your net worth, and keep minimal cash on hand
2. When you need cash, borrow against your assets using a pledged asset line / portfolio line of credit at an interest rate that’s much lower than normal sources of credit. Loans aren’t considered income so you don’t pay taxes. You also don’t have to sell any of your investments, so not only do you not pay any capital gains taxes, you get to stay invested.
3. You repeat this process every year, allowing your portfolio to grow and not paying a dime in either income or capital gains taxes
4. When you die, your heirs inherit your portfolio and get a step-up in basis on your investments. Say your investments were worth $1MM when you bought them and $10MM at the time of your death. Normally you’d owe cap gains taxes on $9MM in gains if you sold them, but thanks to the step up in basis for your heirs, the new cost basis for your investments is $10MM. So if the investments continue to grow to $12MM and your heirs sell, they’d owe cap gains on only $2MM (12 - 10) instead of $11MM (12 - 1).
Consider as well that the interest rates on the portfolio lines of credit are very low compared to other forms of debt — IKBR’s current rate is 4.66% and used to be as low as 0.75% when general interest rates were lower. In the long run, as long as the rate of appreciation of your portfolio > the interest on your portfolio line of credit, you’ll always come out ahead. Assuming you invest everything in a total market index fund like VTI that has an average annual growth rate of 9.79% over the past 30 years, you’ll more than offset your interest expense all while not paying any taxes.
I'm absolutely in this situation with a mid-seven figure portfolio. However, it's not the same thing as not having tons of money. My investments are fairly liquid and as your friend has suggested, it's possible to get a line of credit or a loan for a short period of time and pay it off.
Google "buy borrow die"
According to the buy, borrow, die strategy, leveraging assets as collateral allows you to borrow money while preserving the value of the underlying assets. Rather than selling off investments for cash and incurring capital gains tax, you can borrow against your assets instead.
If inflation runs at 10% but interest on cash savings is at 1%, these rich people won't be rich for very long if they hold their capital in cash.
But being so illiquid that you need to take out a personal loan for basic living expenses also doesn't sound like something a financially stable millionaire would need to do.
No doubt about the fact that financially stable is one of the most important factors.
I also want to mention that when you have big portfolio of assets, banks are willing to lower their loan rates because you aren’t a risky profile
Speaking at an anecdotal level, people will keep emergency cash in case they need it ASAP. Starting at $50K+
There are others I know in the Upper middle class that will hoard cash and take on no debt excluding college and a mortgage
I'm guessing it's usually more tax-efficient to use a revolving line of credit rather than cash, although with recent interest rate increases, that might be different now.
Ultra wealthy folk will have both.
Correct! It's sketchy how it has to be loan money paying for his essentials
Sooo I can't go swim in Scrooge Mcduck's vault?
"I've always heard that most truly wealthy people don't have tons of cash on hand"
Hear different things. Hardly any wealthy person has to take out a freaking loan to buy groceries. That's silly. Also, almost every truly wealthy person has a safe or safe deposit box with cash in it.
Sometimes wealthy people are property-rich and relatively cash-poor, but the cash in the pocket or purse of any wealthy person is likely to be higher than the cash available to over 90% of the working, paycheck to paycheck population.
I’m not wealthy but a considerable portion of my net worth is tied to my car lolz
Wealth and liquidity are 2 different things that have to be evaluated together. Take venture capital, it only gets valued when someone comes in at a later round, and even if its worth a crazy amount its not liquid until it gets to public markets or you find a private market buyer. You either need cashflow from something else or to take a loan from the bank. The same goes for being a 401k millionaire, sure you are wealthy on paper but its not liquid and you cant really take a loan against your assets unless you qualify for hardship.
This was actually an issue when I bought my house.. they hated that I didn’t just have a bunch of cash… for some reason “I have it invested making money for me” was a bad reason..
He is prolly just getting a loan so he can have cash without having to exit the markets right now. Might be in a good spot, or a really bad spot. I do this myself while paying off loans with dividends, however i prefer automation in my financial assets as im lazy. Key thing to remember is never ever ever borrow more then you can spend, fuck leverage fuck leverage fuck leverage. Its a double sided blade, just not worth it in my very un professional opinion
Most use portfolio loans not cash
My parents are wealthy and have a substantial amount of cash in money market checking accounts for easy access.
I have 1M in home equity with a HELOC ready to deploy when RE crashes, 1M in the market, 1M in company RSUs as part of my salary, and $3000 in my bank account. Definitely cash poor but have easy to access stocks I can sell or margin loan I can extend myself for 12months if needed and my fixed 30 year mortgage is at a 2.75% rate.
It's possible that he was lacking in personal liquidity due to decisions on how he used his business profits (namely, if he reinvested them) and also may lack the cash flexibility in the business to issue dividends to solve his personal liquidity issue. He's probably over-leveraged with large lines of credit funding the businesses' operations, but if he can point to clear income it wouldn't be difficult for him to get a personal, no strings attached loan (like not securitized by an asset) as long as he has a personal guarantee on it.
Sure. Use a theoretical example of a farmer with 40 acres in the middle of Manhattan. All his value is tied up with his land. He may have very little cash in hand.
Wealthy people are just a permutation of that. Their wealth could be a business, land, art, etc that are very hard to liquidate in a moments notice. Accordingly, they'll often take out a loan against their assets.
zero-cost collar on the assets, then take out pledged asset line at low rate, live on the loan.
this was common before the interest rate rise.
I'm not anywhere near rich and even I don't have tons of cash on hand/in my bank accounts lol. Whenever I need to buy something I put it on credit cards/low interest line of credit and then pay it off with my next paycheck. The remainder of my paycheck goes towards investments so very shortly after payday I don't have much spare cash sitting around
The key question is how much is interest. Credit cards have grace periods. Loans are often under prime and paying interest on a few days of grocery money is negligible
taking a loan is always better
cause if you use your money you are interrupting your compounding
I had a friend who's dad did land deals. He would get paid once every 2-3 years. So that is when they bought cars, computers, and capital goods. After awhile their power would get shut off in the summer due to non-payment.
To get more vertically integrated after one of the pay days ,he bought a bank so that he could take their share of the processing as well. There was at least one more cycle of the power getting shut off after that.
So the guy does \*huge\* land deals, owns a bank and doesn't have enough cash to pay his power bill.
Wealth and liquidity are different things. Should not be conflated.
You're also asking for a generalization -- it's not that simple, so your statement cannot be validated or repudiated so easily, it's really more complex and "it depends" is the true answer.
Keeping your money in fiat currency long-term is dumb because of inflation. Most rich people put their money into revenue generating assets (businesses, assets, etc.)
An in terms of your friend - it's possible they took the loan from themselves. It's a tax hack that rich people use to unlock their equity, without having to pay taxes on the loan or even sell that equity. You're just borrowing from yourself
Can you explain how that works mechanically?
I don't think it's true at all but I think some of it depends on a person's cash flow and stage in life. They may have cash tied up in a business like a working capital fund or a real estate slush fund they wouldn't want to access but they could. You get a loan when your money is tied up and you need liquidity. You are over leveraged when you take too many loans and your assets dropping the price and you have to sell double the TSLA shares that you planned on.... (Hi Elon)
The majority of the people I know that have both an income and 5 + million in assets do tend to keep what you would probably consider a significant stack of bills on hand. Multiple house safes etc. $50k in cash is less than 1% of net worth. Many of them are also conspiracy theorists and are hoarding gold too.
My emergency fund for instance Is 5% of my net worth and I usually don't keep more than $1k on me unless a hurricane is coming.
True. Also because they can use their assets as collateral and so they can easily get loans.
The rate on a loan is lower than the taxes on realised gains.
My Dad has a pretty high net worth and he hardly ever holds cash in a ban account, in fact most of the time he is in his overdraft.
>I've always heard that most truly wealthy people don't have tons of cash on hand because their money is making money
I think that's a reasonable approximation of most wealthy folks.
Even those who do keep a significant amount of cash it doesn't usually represent a large percentage of net worth. At least, not those in the accumulation phase.
>I have a business friend who even had to take out a large loan to pay rent, groceries, etc due to no cash on hand.
I'm certain this is quite uncommon. Even for those who keep very little cash on hand the extreme majority have adequate cash flow.
I'd also suggest that the many comments here of reliance upon debt by the wealthy is largely a mischaracterization. Most wealthy largely eschew debt.
They're not allergic to appropriate debt like a mortgage or even a modest car loan, but they largely buy all things outright - not borrowing against assets.
Read The Millionaire Next Door and spend some time on Bogleheads.
Of course the wealthy is a broad cross section with a varied financial life.
How would we know?
Definitely true. Especially if they’re a multi-millionaire in net worth. The money is often tied up in stocks, property, etc. They might have like 100K in actual cash in bank accounts and that’s it. Then if they need to make a big purchase (like a cottage) they get a mortgage or use leverage of their assets.
Multi millionaire here. I have 10k in my checking. The rest is locked up in private equity.
Yes, it's the same reason some wealthy folks don't seem to pay very much in taxes despite their net worth. Wealthy folk will have most of their net worth tied up in assets especially equities, banks want to hold those assets and will offer lines of credit secured against the client's equities at really low rates in exchange. Then the wealthy folks will just draw from the line of credit as needed. Your business owner friend is probably just in trouble though.
If you have more than 125k saved up outside retirement, but invested at a brokerage, you can get industry low loans secured by stocks, bonds, index funds, etc. This is generally referred to as a margin loan or pledged asset loan. Based on my sleuthing of r/FatFire, this is 100% how many rich people deal with liquidity issues.
To simplify other answers, more money usually means you can put your money into more long-term investments. However, anyone who’s smart with money needs liquid assets. Investment accounts, cash, etc. Otherwise, one month of poor earnings could bankrupt you.
Sorry but for someone really wealthy daily expenses will never be significant enough to take a loan to cover them. This is total nonsense. Thats talk of wannabe successful people who dont want to realise losses.
El Chapo did.
Not having cash to buy groceries is a bit extreme. But when I had exposure to those types, we usually had them keep 3-6 months spending in cash, plus any firm expenditures that we knew were coming up such as real estate, gifting, etc.
You have to consider that a million dollars really isn’t that much. If it’s not invested and is the source of spending money, it’s not going to last long
1. Yes, wealthy people have cash. For a number of reasons. But one of them is so they can continue to buy assets when the market is down (cheap). This cash comes from investments that generate cash (not from selling investment assets as a matter of course).
2. If a wealthy person finds themselves in a minor cash crunch, they margin to get the minimum cash they need to cover the cashflow requirement. Again, key is you're not selling investment assets to generate cash. You may sell investment assets for many other reasons, but generating cash is not one of them.
3. Your business friend is probably not wealthy, he's just rich, and might not be long-term if he keeps making bad money decisions.
If the decisions are what they are actually talking about, then they can definitely continue working on it.
You never heard of cash buying a benz?
I'd understand if it was a large loan to invest on a business but on basic necessities... Maybe you should ask yourself whether he was telling you the truth or tricked you into thinking that he was wealthy.
Their card is their friend when they do not have cash on hand so why would your friend take out a large loan?
Your friend is most likely a con or making up things...
Absolutely right about it. This is why you should never do these kind of things.
Loans for essentials? Not even on businesses or investments?
Maybe your business friend has tricked you into thinking he's wealthy
He could be wealthy of debts but seriously, that's not what rich people do
Why would anyone have tons of money lying around? All income you don’t allocate for bills and expenses should be at work.
That's suspicious... it's easy to take out money to use as cash on hand so if you think he's a multi millionaire, what do you think would he lose if he takes out money to use for cash on hand?
I keep enough cash in checking/savings to cover all automated bills and a few grand extra for short notice plane flights (e.g., for a family emergency). Everything else is invested in real estate or stocks... (and sometimes futures when I'm day trading). If your friend has to take a loan to pay routine bills then that is just poor financial management AND a waste of time. After I got "wealthy", time became more important to me.
If you can't prove that he's wealthy, then, you shouldn't believe that he's a multi millionaire.