Rich Folks' Cash: Many Banks, Insured

Rich people don't keep their money under their mattress or in a safe. Instead, they invest it in a variety of ways to grow their wealth. While they do keep some money in bank accounts, this is usually only a small percentage of their overall wealth. Many millionaires keep their money in cash or highly liquid cash equivalents such as money market mutual funds, certificates of deposit, commercial paper and Treasury bills. They also invest in stocks, mutual funds, retirement accounts and real estate.

Rich people keep their money in cash or highly liquid cash equivalents

Rich people keep a lot of their money in cash or highly liquid cash equivalents. They tend to establish an emergency fund before making investments.

Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples include money market mutual funds, certificates of deposit, commercial paper, and Treasury bills.

Some millionaires keep their cash in Treasury bills, which they roll over to reinvest and liquidate when they need cash. Treasury bills are short-term notes issued by the US government to raise money and can usually be purchased at a discount.

Millionaires also have zero-balance accounts with private banks. They leave their money in cash and cash equivalents and write checks on their zero-balance account. At the end of the business day, the private bank sells off enough liquid assets to settle any expenses made that day.

Other millionaires have safe deposit boxes full of cash in various currencies, located all over the world. Each currency is typically held in a country where transactions are conducted using that currency.

It is important to note that rich people do not keep all their money in cash or cash equivalents. They also invest in stocks, bonds, mutual funds, retirement accounts, real estate, private equity, hedge funds, and alternative investments such as fine art, vintage cars, and yachts.

They use private bankers to manage their wealth

Wealthy individuals often turn to private banks to meet their financial needs. These institutions offer a range of services, including investment management, tax planning, trust and estate planning, and estate planning. Clients are typically assigned a dedicated private banker or relationship manager who becomes their single point of contact for all financial matters.

Private banking caters to high-net-worth individuals (HNWIs) with at least $1 million in liquid assets. These individuals tend to have more complex financial needs than most retail consumers, and private banks provide a personalised set of services to help clients meet their financial needs.

Investment Management

Private bankers provide investment advice and manage their clients' investment portfolios. They offer a range of investment options, including stocks, mutual funds, private equity funds, and hedge funds. Private bankers also advise on alternative investments such as fine art, expensive musical instruments, rare books, and intellectual property rights.

Trust and Estate Planning

Private bankers assist clients in trust and estate planning to ensure the preservation and transfer of wealth to future generations. This includes establishing trusts, drafting wills, and providing guidance on tax implications.

Tax Planning

Wealth management also involves tax planning to optimise tax efficiency and ensure compliance with regulatory requirements. Private bankers work with their clients to develop strategies that minimise tax liabilities while maximising returns.

Dedicated Relationship Management

High-net-worth individuals often have a dedicated private banker or relationship manager assigned to them. This professional becomes their primary contact for all financial matters, providing a highly personalised service. The private banker tailors their services to fit the client's unique financial situation and goals.

Access to Exclusive Opportunities

Private banks have access to a wide range of investment opportunities due to their size and global presence. They can offer exclusive investment options that may not be available to the general public.

Convenience and Accessibility

Private banks often have a global presence, which is advantageous for wealthy clients who frequently travel. A private banker can provide continuous support and ensure seamless access to financial services across different countries.

In summary, high-net-worth individuals utilise private bankers to manage their wealth by providing comprehensive financial services. These services include investment management, tax planning, trust and estate planning, and dedicated relationship management. Private bankers help their clients preserve and grow their wealth, offering a personalised and exclusive level of service.

They invest in stocks, mutual funds, and retirement accounts

Rich people don't usually keep their money in banks. Instead, they invest their money in a variety of ways to ensure that their wealth grows. Here are some of the common ways rich people invest their money:

Stocks

Investing in stocks is a popular way for rich people to grow their wealth. They buy shares of ownership in various companies, including private and public companies. This allows them to profit from the success of these companies and increase their wealth over time.

Mutual Funds

Mutual funds are another investment option for rich individuals. Mutual funds are a type of financial vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. This diversification helps reduce risk and provides access to a wider range of investment opportunities.

Retirement Accounts

Retirement accounts, such as self-directed Individual Retirement Accounts (IRAs) or 401(k) plans, are also commonly used by rich people. These accounts offer tax advantages and allow for a wider range of investment options compared to traditional retirement accounts. By using self-directed retirement plans, rich individuals can invest in alternative investments such as private company stock, real estate, and other assets. This enables them to accumulate multimillion-dollar retirement portfolios over time.

Rich individuals often have a comprehensive understanding of investing and know how to take calculated risks. They focus on growing their wealth by investing in a diverse range of assets and markets, both domestically and internationally. Additionally, they may seek advice from financial planners and investment managers to make informed decisions about their investments.

They put money into real estate

Real estate is a common way for millionaires to invest their wealth. Typically, they start by purchasing a primary home, then buy additional residences, often for tenants. After buying personal real estate, they may begin investing in commercial real estate, such as office buildings, hotels, stadiums, and bridges.

Millionaires often have large real estate portfolios. Once they have established themselves as buyers in the real estate market, agents start bringing them deals, and they can easily obtain financing. Large investors have millions tied up in real estate.

Real estate may not provide immediate cash, but it can be lucrative in the long run and is a tried-and-true investment for millionaires seeking passive income.

Since the Covid-19 pandemic, there has been a trend of investing in tangible assets, such as real estate. Geographically diversified investments are crucial, so it's important not to put all your eggs in one basket.

Real estate investments are just one way that millionaires keep their money. They also invest in stocks, mutual funds, retirement accounts, cash and cash equivalents, private equity funds, hedge funds, and alternative investments.

They use private equity funds

Private equity funds are an option for the ultra-rich to invest their money. Private equity funds are investment partnerships that buy and manage companies before selling them. They are often grouped with venture capital and hedge funds as an alternative investment. Private equity funds are typically operated by private equity firms on behalf of institutional and accredited investors. These funds may acquire private or public companies in their entirety or invest in buyouts as part of a consortium.

Private equity funds have a set term of 10 to 12 years, and the money invested is not available for subsequent withdrawals. The funds usually start distributing profits to investors after a few years. The average holding period for a private equity portfolio company was 5.6 years in 2023.

Private equity firms buy companies and implement changes to increase their value. They may bring in their own management team or retain the existing managers to execute an agreed-upon plan. The acquired company can make operational and financial changes without the pressure of meeting analysts' earnings estimates or pleasing public shareholders.

Private equity firms' main focus is on increasing the value of their portfolio companies. They may also have special expertise that the acquired company's prior management lacked, such as helping the company develop an e-commerce strategy, adopt new technology, or enter new markets.

The strategy of "buying to sell" is a key reason for private equity's success. Private equity firms focus on acquisitions that have been undervalued or under-managed, presenting a one-time opportunity to increase a business's value. Once the desired gain has been achieved, the firm sells the business for a maximum return.

In contrast, public companies usually "buy to keep", potentially diluting their returns by holding onto the business even after its growth has tapered off. Private equity firms' freedom from public company regulations and their aggressive use of debt also contribute to their higher returns.

However, it's important to note that private equity funds are not as liquid as public equity. Investors in this asset class are required to commit significant capital for years, which is why access is limited to institutions and high-net-worth individuals.

Frequently asked questions