The question of what wealthy individuals do with their money is an interesting one. When someone has accumulated a substantial amount of wealth, they have many options on how to utilize those financial resources. From investing to philanthropy to luxury purchases, the rich have choices that most average people do not. Understanding how the wealthy use their money can provide insight into how they think about their fortune and what is important to them. This article will explore some of the common ways that rich people deploy their cash reserves.
Savings and Investments
One of the most basic things that the wealthy do with their money is save and invest it. While the average person may struggle to consistently put away even small amounts of their income, the rich have the luxury of being able to set aside large sums in savings accounts, money market funds, certificates of deposit, and other low-risk savings vehicles. This provides security, stability, and ready access to cash when needed.
The rich are also able to invest at much higher levels than the general population. They have surplus funds to put into investment vehicles like stocks, bonds, mutual funds, real estate, and alternative investments. Their resources allow them to invest broadly and take risks that could generate very high returns. The wealthy work with financial advisors to build diversified investment portfolios tailored to their goals and risk profiles.
Key Benefits of Savings and Investments
– Preservation of capital
– Growth of wealth over time through compounding returns
– Regular income generation from interest, dividends, rent payments, etc.
– Tax advantages from certain types of accounts
– Ability to pass on wealth to heirs
Luxury Purchases
A stereotype of the wealthy is buying expensive toys and living a lavish lifestyle. While not all rich people spend frivolously, some certainly use their money to acquire luxury goods and services. What may seem like outrageous excess to average people is simply everyday life for the ultra rich. Some common luxury purchases of the rich include:
– Supercars like Lamborghinis, Ferraris, Bugattis – $200,000+
– Private jets – $5 million+
– Mega yachts – $5 million to $500 million+
– Lavish homes/real estate – easily into the millions for exclusive properties
– Designer fashion – $300 for a shirt or $10,000 for a dress
– High-end jewelry and watches – $50,000+ for a watch
– First class travel
– Personal chefs, butlers, assistants, and staff
– Exotic vacations to luxury resorts
For the super wealthy, these types of extravagant expenses are a drop in the bucket of their multimillion dollar net worths. And they provide instant gratification that the rich can well afford.
Reasons for Luxury Purchases
– Hedonistic pleasure – enjoyment of the finer things in life
– Sense of exclusivity – ownership of rare, expensive items
– Status symbol – communicates wealth and privilege
– Unique experiences – opportunities only available to the rich
– Passion – enthusiasm for sports cars, jewelry, etc.
– Worthwhile investment – luxury goods may appreciate in value
Philanthropy
Many wealthy individuals feel a sense of social responsibility and choose to give a portion of their fortune to charitable causes. Elite philanthropy takes many forms, including:
– Establishing a personal or family foundation – Gates Foundation
– Donating to existing charities – universities, hospitals, museums, churches
– Funding specific causes – medical research, poverty reduction, climate change action
– Microlending in developing countries
– Impact investing – investments in companies deemed socially responsible
– Volunteering time and expertise
The tax incentives of charitable giving are an added benefit for the wealthy. But philanthropy also provides intangible rewards like goodwill and social status in the community. The ultra rich have the resources to make a significant positive impact on the world through their charitable initiatives.
Notable Elite Philanthropists
Name | Net Worth | Philanthropic Focus |
---|---|---|
Bill & Melinda Gates | $129 billion | Global health and development |
Warren Buffet | $106 billion | Education, economic development, health |
George Soros | $8.6 billion | Democracy, human rights, social justice |
Michael Bloomberg | $70 billion | Public health, environment, arts |
Political Donations
The rich can have an outsized influence on politics through campaign donations and lobbying efforts. Major political donors among the wealthy elite include:
– Representatives of industry – ex: energy execs, Wall Street bankers
– Ideological donors – ex: Tom Steyer (liberal), Sheldon Adelson (conservative)
– Single issue donors – ex: Michael Bloomberg on gun control
– Libertarian donors – ex: David + Charles Koch, Peter Thiel
Large donations buy access to politicians that the average person does not have. Wealthy donors use this access to promote policies that benefit their business interests and personal ideologies. Critics argue an undemocratic distortion of politics in favor of the rich. But supporters say political donations are an exercise of free speech.
The rich have the advantage of donating through Super PACs, which allow unlimited contributions. Some wealthy individuals have spent $100 million or more trying to influence elections. Even small personal donations from the rich can dwarf those from average citizens.
Top Political Donors in 2020 Election Cycle
Donor | Total Contributions | Favored Party |
---|---|---|
Michael Bloomberg | $1 billion | Democrat |
Tom Steyer | $345 million | Democrat |
Sheldon & Miriam Adelson | $218 million | Republican |
Stephen Schwarzman | $35 million | Republican |
Private Businesses
Instead of just investing passively, many wealthy individuals use their money to acquire or launch private companies. They may buy an existing firm as an investment or to gain control of a brand. Or they may start a new company from scratch and self-fund the early stages.
Private enterprises controlled by the rich include:
– Holding companies that own diverse corporate assets – ex: Berkshire Hathaway
– Large family owned businesses passed down generations – ex: Walmart
– Businesses founded by a wealthy entrepreneur – ex: Microsoft, Amazon, Tesla
– Sports teams – ex: Steve Ballmer bought the Los Angeles Clippers
– Media outlets – ex: Jeff Bezos owns the Washington Post
Owning a private company allows the wealthy to exert control over a key enterprise and profit from its success. The ultra rich have the capital resources to buy or build massive corporations and the business expertise to provide effective oversight.
World’s Richest Self-Made Business Owners
Individual | Net Worth | Primary Company |
---|---|---|
Elon Musk | $209 billion | Tesla, SpaceX |
Jeff Bezos | $124 billion | Amazon |
Larry Page | $95 billion | |
Mark Zuckerberg | $67 billion | Meta (Facebook) |
Lavish Lifestyles
Owning several luxury homes in prime locations around the world. Flying private and owning a fleet of supercars. Hiring top chefs to cook every meal. These are aspects of the lavish lifestyles of the ultra wealthy. While not every rich person lives so extravagantly, some certainly do embrace the spoils of their wealth.
Why do some rich people choose to live so large? Reasons may include:
– Hedonism – pursuing maximum pleasure and enjoyment
– Ego gratification – flaunting wealth is a power trip
– Competitive culture – pressure to keep up with other rich friends
– Personality – born shoppers vs. frugal types
– Boredom – looking for stimulation when you “have it all”
– Possessiveness – desire to acquire and control beautiful things
– Host culture – expected of celebrities, finance guys, etc.
Extravagant consumption patterns of the rich attract public fascination and often some resentment as well. But the wealthy elite argue their lavish spending stimulates economic growth. And they pay sales taxes on their purchases that benefit the public.
Traits of a Lavish Rich Lifestyle
– Owns multiple mansions, penthouses, beach houses
– Has a private jet, helicopter, and/or yacht
– Drives luxury supercars like Ferraris and Bentleys
– Vacations at 5 star resorts in the French Riviera
– Wears designer fashion and expensive jewelry
– Eats at Michelin star restaurants regularly
– Surrounds self with attentive personal staff
– Shop at high-end stores for pleasure; cost is irrelevant
– Spares no expense for weddings, parties, charity events
Tax Avoidance Strategies
The wealthy elite have access to sophisticated tax planning services to help them reduce taxes on their fortunes. While tax avoidance is legal, critics argue some methods used by the rich to limit taxes are unethical. Common strategies include:
– Funneling money into offshore tax shelters in known havens like the Cayman Islands or Switzerland
– Using complex trust structures to pass wealth onto heirs tax free
– Investing in assets with privileged tax treatment – ex: municipal bonds, capital gains
– Exploiting carried interest loophole for private equity managers – treats compensation as capital gains
– Deductions for private jets, business expenses, and other write offs
– Donating to charity for the tax deduction
The wealthy typically exploit every legal means at their disposal to minimize taxes. With expensive accounting and legal talent, they take advantage of technicalities and loopholes unavailable to average taxpayers.
Tax avoidance fuels economic inequality by allowing the rich to accumulate even more outsized wealth. Some ethicists argue it is a failure in social responsibility. But most wealthy individuals view strategic tax planning as fully justified to protect their fortunes.
Sample Methods the Wealthy Use to Reduce Taxes
Method | How It Works |
---|---|
Trusts | Assets are controlled by a trust so not technically owned by taxpayer |
Capital Gains | Taxed at lower rate than ordinary income |
Carried Interest | Hedge fund fees treated as capital gain not income |
Donations | Gifts to charity are tax deductible |
Intergenerational Wealth Transfer
Passing on wealth to one’s heirs is a priority for many of the rich. A key advantage of wealth is providing advantages to future generations through inheritance. With proper planning, the wealthy can transfer millions or even billions tax free upon death through estate planning strategies.
Tools used by the rich for estate planning include:
– Trust funds – assets controlled by trustees for beneficiaries
– Foundations – funds in a charitable organization
– Life insurance – to provide liquidity for taxes and bequests
– Wills – specify who inherits assets
– Philanthropy – donate to causes heirs believe in
– Transferring ownership ahead of time
– Sophisticated use of gift tax exemption
The wealthy have access to the best legal counsel to implement strategies like Grantor Retained Annuity Trusts to pass wealth on tax efficiently. While average Americans may struggle to leave even small inheritances, the rich focus extensively on intergenerational wealth transfer.
America’s Richest Family Dynasties
Family | Wealth Origin | Net Worth |
---|---|---|
Walton | Walmart | $215 billion |
Koch | Koch Industries | $124 billion |
Mars | Candy company | $120 billion |
Cargill-MacMillan | Agribusiness | $42 billion |
Conclusion
Wealthy individuals have many options when it comes to deploying their substantial financial resources. The rich can save, invest, spend on luxury goods, donate to charity, fund political causes, buy businesses, and pass wealth onto future generations. How they choose to leverage their money provides insight into their values, personalities, and priorities. While the wealthy have unequal access to power and advantage, many also contributor positively through philanthropy and economic activity. America’s elite class will continue using their fortunes to shape the nation and world in profound ways.