How can rich people drop all so much money on a daily basis but when they need larger amounts of money, they need to liquidate assets?
Yes, I know that wealth can come from owning assets outside of cash, but how can you spend hundreds of thousands of dollars a month if a their money and wealth is all tied up?
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Liquid cash doesn’t earn you interest, so you want to try and keep only what you’re going to spend in a specific period of time in a liquid account.
Rich people get rich but loaning their money out. If you have $2 million in the bank, you are likely to earn $100,000 per year in interest…
If you have $10 billion in a trust fund that pays you $25,000 a year, you are rich but not liquid. Your net personal worth is $10 billion, but you are only receiving $25,000 a year, and are unable to actually use that $10 billion dollars to buy anything
They go to a bank, show the bank all of their assets then take a loan out against some/all of those assets to have cash on hand. then payoff the loan on the passive income they do earn or the liquidation of assets not put up against the loan. This is part of how they avoid paying taxes, loans don’t count as income.
Simply put, rich means having a high net worth. Net worth is total assets minus total liabilities. If your total assets are say $10mm and your total liabilities are $1mm, your net worth is $9mm, rich. But if the assets consist of real estate worth $9.95mm and $50k of cash your rich but illiquid. Real estate being an illiquid asset.
Billionaires finances don’t work like the average Joe. We are told our whole lives to stay out of debt, and save money.
For Billionaires it makes more sense for them to rent, mortgage everything, and borrow money because paying interest is cheaper than paying taxes and liquid money doesn’t earn value the way that investments do.
A big factor in why they can do this is that they can afford to have an army of Lawyers and Accountants to manage it all for them.
If a Billionaire needs cash they can get it in a number of ways
1. Borrow money – taking out loans for Billionaires is super easy. They have mortgages and car loans just like you do because it makes more financial sense for them to do that then pay cash. Larry Ellison of Oracle for example has borrowed millions from banks using his own Oracle stock as collateral. The profits he makes by keeping the stocks is more than his interest payments on the loans.
2. Credit Cars – all their day-today expenses are paid on Credit Cards for ease of use and to get the points and benefits. Their accountants take car of the back end.
3. Paychecks – Most Billionaires are officers (CEO, Chairman, etc) of their own companies and draw a significant salary from that. They also write their own contracts so they get obscene benefits packages like travel expenses, corporate jets, free healthcare insurance, expense accounts, and can write-off a lot of expenses.
4. Selling stock – Billionaires can sell off stock and assets to make money, but they avoid doing that because they have to pay significant taxes on that. Also they want to keep their portfolios because stock is ownership in their companies
5. Free stuff – Billionaires and celebrities get a surprising amount of free-stuff. Sponsorship deals for example pay celebrities to use their product for marketing purposes. When you see someone on a TV show, getting an interview, doing a speech, or even showing up to a big party they are often paid to show up and get free hotel + food + travel along with it. The venue does this to encourage other people to come.
5. Dividends – Billionaires are paid dividends on their stock from the profits of their companies.
Most people are rich because they own companies or parts of companies. Some famously don’t take a salary from the company and only make money when the company makes money. Often those shares are restricted from selling or not traded on exchanges, so they can’t sell to finance their lifestyle. They can borrow against those assets, but if the stock goes down, the bank suddenly wants their money back or they want more assets to hold for collateral.
On the expense side, it depends how rich. It’s fairly easy to burn through a few million on suits, watches and a house suitable to your position. Those are kind of ordinary business expenses just to maintain the appearance of a successful entrepreneur and you need to pay lawyers and accountants and private school for the kids. Maybe a nice vacation once or twice a year.
For the fabulously wealthy, just buy a yacht you only use a month every year and your paying 10 million a year upkeep on a 100 million yacht. Business not good this year and nobody wants to buy your yacht? Sorry, the bank wants it back.
Even those with illiquid wealth like stocks or real estate still have some money coming in from dividends, interest payments, rents, etc. That may be sufficient to cover day to day expenses, while they need to sell off stock for larger purchases. The rich also often have lines of credit they can tap into, secured by their assets. This again gives them access to cash they can drop, but at some point they’ll need to pay down the credit line by selling assets.
Liquidity measures how easily holdings can be moved or converted into other financial instruments.
I can own $500 million in real estate and have no cash in the bank. I am quite rich. But because I have to sell property before I have any cash to spend, my wealth lacks liquidity.
If my net worth is the fifty dollars I have in my wallet, I am dirt poor. But my assets are completely liquid.
Ever heard of a liquidation sale? Businesses that go belly up will try to sell off their inventory to generate cash, even if prices yield an apparent net loss, because money’s time value means that wealth you can spend now is literally worth more that wealth you cannot spend now.
Time value of money is the essential principle upon which concepts like interest are founded.
Banks will lend cash to people of high net worth, who must then pay back the loan plus any interest the bank charges. This gives the lendee access to liquid cash, for which they pay a fee (interest).
A combination of dividends, interest, and loans.
So you may not be liquid, but your investment holdings may pay regular dividends (in the case of stocks) or interest (in the case of bonds). Also when you have a very high asset wealth, a bank is more than willing to lend you money, as they can be assured the debt can be paid off by liquidating assets in a worst case scenario. A good example of that is the American Express Gold and higher card. There’s technically no limit to spending on the card and you’re only approved to get one if you are able to show that you’d be able to pay off the balance at the end of the month, along with the annual fee.
So the short answer is: They know you’re good for it.
Wealth can be more than cash. If you own a giant diamond the size of a basketball, you are rich. But if you want to buy anything you need to either sell it at a good price(which takes forever),sell at a loss (quicker but stupid) or borrow on it(now you are talking).
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