Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.
In summary, borrowing money can be a strategic financial decision for wealthy individuals, allowing them to maximize returns, manage liquidity, and take advantage of tax benefits while maintaining their overall wealth.
Those with billions of dollars to their name can buy a home outright rather than take out a loan. Yet celebrities like Mark Zuckerberg, Elon Musk and Jay-Z have all made headlines for taking out multimillion-dollar mortgages — not out of necessity but to reap a couple of key benefits.
Billionaires may have checking accounts, but they likely use accounts that cater to ultra-high-net-worth individuals. These accounts may come with perks such as a dedicated banker, waived fees, and competitive interest rates.
Cash and cash equivalents are common places where billionaires keep of some their money. Though not often thought of as an investment, cash is a liquid asset, meaning you can use it in a variety of ways as needs or desires arise. In a crisis, having cash on hand gives you the flexibility to respond.
X.com developed and operated a financial services website with banking services provided by First Western National Bank, an FDIC-insured bank in La Jara, Colorado. The company was initially funded by Elon Musk and Greg Kouri, who went on to fund Musk's later ventures: Tesla and SpaceX.
Mark Zuckerberg just refinanced his Palo Alto home with a 30-year, 1.05 percent adjustable mortgage rate.
Alternative long-term investments: Billionaires often hold stakes in other companies or industries as part of their investment strategy. Additionally, they may invest in tangible assets such as art or collectibles that might not be easily liquidated.
Whilst they can often afford to, most wealthy people don't pay cash for properties because they can make a better investment with their money elsewhere.
Others will object to taxing the wealthy unless they actually use their gains, but many of the wealthiest actually do use their gains through the borrowing loophole: They get rich, borrow against those gains, consume the borrowing, and do not pay any tax.
Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. And they tend to establish an emergency account even before making investments.
Rich Americans often have a dedicated financial team that caters to their specific banking needs. “Wealthy clients receive highly personalized banking services. This includes dedicated financial professionals who are available around the clock to handle all banking needs and provide financial advice,” Tamplin said.
Since income is not one of the five factors that determine a credit score, the wealthy are just as likely to have a low credit score as the people with lower income.
Several popular banks, like JP Morgan, Bank of America, Wells Fargo, Citi Bank, and Goldman Sachs, offer private banking options that provide millionaires with wealth management advice and services.
401(k) loans
With a 401(k) loan, you borrow money from your retirement savings account. Depending on what your employer's plan allows, you could take out as much as 50% of your vested account balance or $50,000, whichever is less.
Individuals are insured at banks for up $250,000 in both deposit accounts and another $250,000 for deposits kept in IRAs. This allows individuals to keep up to $500,000 safely under the insurance limit, or $1.5 million for couples.
This is what the memes get exactly wrong: billionaires don't become and stay rich by hoarding; that's the last thing they want to do with their money. There are related myths and assumptions, such as that the only way to accumulate a net worth of so much money is through evil, if not outright unethical, means.
Wealthy people love credit card perks
Different cards offer cash back, rewards, low interest, or no interest. Having a couple of cards is a good way to maximize the perks and avoid high interest costs. Credit cards are typically quite secure, with strong fraud protections in place to safeguard cardholders.
The short answer is that this simple action provides liquidity and enables the super-rich to invest their wealth in other opportunities where they can potentially make even more money.
As financial expert Sarah Newman explains, "Why pay off a mortgage when you can invest that money and earn a higher return? It's about making your money work harder." Jay-Z, for instance, took out a mortgage on his $88 million Bel-Air estate. He could have written a check, but took out a loan.
Musk's loans are for 30 years with a fixed 3.5% interest rate for the first few years that then adjusts based on an index. Providing mega-mortgages helps bank profit margins in the short run and is highly strategic long-term.
To handle that, he has credit cards and debit cards on bank accounts. He can also write checks against his bank accounts. He does not use such cards or checks to buy things like Twitter; big purchases are done with bank loans, more like mortgages for a house.
Bezos also reportedly owns property in New York City and Miami as well as in Hawaii and a large parcel of land in Texas. Jeff Bezos spends some of his wealth on philanthropic ventures, including addressing climate change.
Tesla partners with big banks like Wells Fargo and US Bank for financing. A good credit score (720 or higher) or a large down payment (typically 20%) make it more likely that you'll get approved for a lower rate. US Bank's lowest auto loan rate as of February 2023 is 6.86%. Loan terms are typically 36-72 months.