How The Super-Rich Manage Their Money

What’s the best part of being super-rich?

Having all that money.

What’s the worst part about being super-rich?

Dealing with all that money.

A net worth of, say,  $200 million comes with all sorts of obligations, chores, and emotional issues.  First and foremost is the considerable work of protecting and growing that wealth.  Then come the non-stop demands of administering the fortune, and all that goes with it – bills, taxes, houses, cars, planes, charity commitments, family disputes.  It’s like a full-time job!

How do the wealthy handle all of this?  They don’t.  They do what many of us do – they hire people to handle it.  Of course, that arrangement looks just a little, teensy bit different for the wealthy.

The Family Office

Many “high-net-worth” individuals, defined as those with upwards of $2 million in investable assets, have a team of professionals who work together on the full range of money matters, from investment management to taxes avoidance to estate planning and other legal issues.  The squad typically includes an investment advisor, CPA, lawyer and private banker to handle business at their financial institution.  (You won’t find any high-net-worth folks at the bank drive-up window at 5pm on payday.)  With the exception of a private banker, you likely have a similar team of pros in place.   Rich folk just keep their guys a lot busier.

Related: [Podcast] Putting Together Your Financial Dream Team

The super-rich often take the Team Money concept a big step further by establishing a family office, a private firm that manages just about every aspect of life for the family.  In addition to the tasks listed above, the family office often manages home and vacation properties, vehicles, charitable giving, trust-fund disbursements, children’s allowances, and art or wine collections.  Family office staffers can even mediate money-related disputes between family members.

This level of skill and attention doesn’t come cheap.  A family office can cost about $1 million per year, according to The Wall Street Journal.  That kind of expense only makes sense for the 5,000 or so U.S. families with $100 million or more in assets.   In recent years several financial outfits have debuted “multi-family offices” operations that serve anywhere from several dozen to hundred families in the $20 million assets range with a slimmed down version of the family office focused largely on asset management.

High Risk/High Reward

Of course, the money ninjas in a family office aren’t paid to review monthly 401k statements and balance the checking account.   The very wealthy tend to have somewhat more complex portfolios.  Just like you and me, they strive for diversification and a balance between risk and security, growth and preservation.   As part of that strategy, they might be invested in some of the same income or growth stocks, ETFs and mutual funds that we hold.  Often times they are focused not on “hot” stocks but those that have shown stability and increased dividend payouts over many years.

Related: Ashely Asks A Question - Why don't people invest all their money in dividend-paying stocks?

But the super rich also have access to higher risk/reward opportunities that demand careful vetting and oversight -- private equity placements, venture capital opportunities, hedge funds and angel investing.  The only money you put in such investments is money you can afford to lose.

Other complex investments, such as a family business, art or real estate might also be in the portfolio.

Trust in Trusts

Being rich makes you a huge target for everything from taxes to scams to frivolous lawsuits.  That’s why the very wealthy often don’t legally own anything.  Instead, their assets are held by trusts.

A trust is a legal arrangement in which a third party holds the assets of the trust beneficiary.  Trusts can be expensive and require some effort to set up, but they offer many potential benefits, including:

  • Protection from creditors, lawsuits, and other claimants during your lifetime.
  • Avoidance of estate taxes.
  • Avoidance of probate court with its delays and public disclosures.
  • The ability to closely control the when/how of distribution of the estate’s assets to heirs.

There are several types of trusts, each with its own set of benefits and requirements.  While trusts are a favored tool of the wealthy, plenty of regular folk employ them to address specific life issues.  A buddy of mine, for example, used a trust to protect the assets of his new family from a vindictive ex-wife.

Related: Estate Planning Basics

See?  You have more in common with the super-rich than you thought.  Regardless how big or small your net worth, you’ve got to handle your business and plan for the future -- sometimes with the help of a professional or two… or 30.

Reminds me of the supposed exchange between legendary writers F. Scott Fitzgerald and Ernest Hemingway.

“The rich are different from you and me,” wrote Fitzgerald.

“Yes,” replied Hemingway.  “They have more money.”

When You Should Adjust Your Financial Plan

Financial planning

Mike Tyson said, “Everybody has a plan until they get punched in the face.” I love that quote for a couple reasons:

  1. It’s Mike Tyson and when he speaks, it’s usually quite entertaining.
  2. It’s extremely accurate – with the caveat that not everyone has a plan.

We all have times in our lives when we get figuratively punched in the face. Life throws plenty of curve balls, and some require changes or adjustments to your financial plan. Let’s look at a few instances where it makes sense to adjust:

  1. Pay raise – Don't think of your new raise as a license to spend freely. While you certainly should enjoy your hard‐earned pay bump, you need to do so within the confines of your plan. We recommend people use the budget TSL (Taxes, Savings, Life). If you're using this budget you'll automatically raises both your spending and savings amounts. A raise may mean you need to contribute more to your 401(k), but it could also mean that you will hit your annual 401(k) max, in which case, you’d need to find other avenues to save like in a brokerage account or Roth IRA.
  2. Kids – It’s a given that life gets more expensive and your financial plan will change when you have kids. You most likely can't anticipate all the new additional costs you'll take on with kids, but you can at least anticipate a few and know where in your budget you can be flexible. Perhaps you'll want to add a college savings account, or maybe your cash flow will tighten so you can't save as much? Having some idea of what to expect will help you better handle those curveballs.
  3. Financial Setbacks – This is the most painful "punch in the face" to your finances. Whether it's a pay cut, job loss, broken down car or hospital bill, the reality is that many of us will face financial setbacks of some type in our lifetime. This is why we preach that everyone should have an emergency fund with three to six months' cash reserve.
  4. Retirement – This financial adjustment will most likely happen as you get closer to retirement. You might have planned and saved for an early retirement only to realize you can't image giving up your job, or you might be forced into early retirement for medical or other reasons. In either of these financial situations, you'll most likely need to make adjustments to either to your allocation, budget or both.

Then there are other times where you feel the need to make major overhauls to your plan when in reality, staying the course is the right call.

  1. Big Returns – Recently we’ve had a few nice years in the market with double digit returns, and we’ve had a few flat years. When markets rise, though, you can’t start acting like that will be the norm. At Wela, we often tell people to expect 6% ‐ 7% returns because it’s an average. Rarely will returns be exactly 6‐7%. This is where people can get into trouble with trying to time the market. Timing the market doesn’t get you 6‐7%, it gets you 2‐3% typically, and that's if you’re lucky.
  2. Major Purchase – When you have the urge to buy something expensive (home/car/boat/nice watch), it’s best to take a step back and be sure it fits within your financial plan. You might want to wait for a raise so you can incorporate the expense in your TSL budget (like we talked about earlier.)
  3. Emotional Career Change – Remember your job is arguably the most central piece to your financial plan. It’s the source of cash flow and often retirement benefits (401(k), 403(b), pension, etc.). Be sure you know the impact that a job or career change will have on your plan. It’s certainly okay to change, but be sure it’s well thought out and a part of your plan. In other words, be sure it doesn’t create an unanticipated change.

If you're going through any of the above changes, or maybe it's something that we didn't include, and you'd like a professional opinion on if it's time for you to adjust your financial plan, create a free Wela account to talk with our team. We love to help clients and users alike get their financial house in order.

3 Options For Newlywed Money Management

marriage financial planning

A common question we receive at Wela is how newlyweds should deal with finances.

Perhaps one part of the pair doesn’t know how to have a conversation about financial matters with their soon-to-be spouse. She may love to buy shoes and he may love to save, or he wants his “boys weekend money” while she wants everything shared. What should they do?

In the early years of marriage, most couples have to learn to compromise and think, act and plan for "we" instead of "me," and that includes financial matters. Considering a large percentage of divorces happen because of money issues, clearly this piece is crucial to get right but something many couples have trouble agreeing upon.

There is not a right or wrong way to go about this, and it very much depends on the investment/savings personalities of the couple. However, the most crucial step that too many people miss is talking about their finances in the first place. It's important to be upfront about both of your saving, spending and investing styles so that you can then both agree upon a plan for how you want to merge your financial lives. You might agree on all financial topics which would make it easier when making financial decisions. You might not agree on any financial topics, in which case you might agree to keep your financial lives separate, at least for a time, while you both work on finding your financial middle-ground.

Related: Will Getting Married Hurt Or Help My Taxes

There are two key issues that are typically on the forefront of newlyweds’ minds:

What do I do with my/their old bank accounts?What do we do with “OUR” money?

How you answer the second question will help you answer the first. There are three possible outcomes for the second question:

  1. Completely Shared - You both share a single account with both your names on it where all cash flow goes into and all expenses are paid. Typically for this to work so that both spouses are happy, you must both have trust and faith that your partner will act responsibly and not hold the other liable for spending more than themselves.
  2. Individual Accounts & A Joint Account- You each have separate accounts where your paychecks are deposited, plus one joint account for some amount of fixed expenses. The shared fixed expense account would handle all joint bills while the separate accounts would be used at the discretion of the holder. Typically the amount each spouse contributes to the joint account is either based on the percentage of income each is responsible for in the family, or based on the percentage of expenses each is responsible for (this is much trickier to navigate).
  3. Completely Separate - You each have your own separate accounts and identify which expenses each spouse will be responsible for, thereby, keeping a black curtain over accounts completely and maintaining maximum financial independence.

We have seen all three options work. Most often, couples start with the second or third option and slowly migrate with more comfort to the first. Once you've decided how you want to handle your finances moving forward, it'll be easier to decide how you want to handle your old accounts.

Marriage is a learning process. When most people get married, they’ve barely figured out their own finances, much less built trust in how their new spouse handles their finances. To speak with an advisor about which options makes the most sense for you, create your free Wela account today.