Editor's Note: This story originally appeared on SmartAsset.com.
Where do millionaires keep their money? High net worth individuals put money into different classifications of financial and real assets, including stocks, mutual funds, retirement accounts and real estate.
Most of the 20.27 million millionaires in the U.S. did not inherit their wealth from family; only about 20% inherited their money. More than two-thirds of all millionaires are entrepreneurs.
Here are some of the places where the genuinely rich keep their money.
Cash and Cash Equivalents
Many, and perhaps most, millionaires are frugal. If they spent their money, they would not have any to increase their wealth. They spend on necessities and some luxuries, but they save and expect their entire families to do the same.
Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. They establish an emergency account before ever starting to invest. Millionaires bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth. There is no standing in line at the teller’s window.
Studies indicate that millionaires may have, on average, as much as 25% of their money in cash. This is to offset any market downturns and to have cash available as insurance for their portfolio. Cash equivalents, which are financial instruments that are almost as liquid as cash, are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills.
Some millionaires keep their cash in Treasury bills that they keep rolling over and reinvesting. They liquidate them when they need the cash. Treasury bills are short-term notes issued by the U.S. government to raise money. Treasury bills are usually purchased at a discount. When you sell them, the difference between the face value and selling price is your profit. Warren Buffett, CEO of Berkshire Hathaway, has a portfolio full of money market accounts and Treasury bills.
Millionaires also have zero-balance accounts with private banks. They leave their money in cash and cash equivalents, and they write checks on their zero-balance account. At the end of the business day, the private bank, as custodian of their various accounts, sells off enough liquid assets to settle up for that day. Millionaires don’t worry about FDIC insurance. Their money is held in their name and not the name of the custodial private bank.
Other millionaires have safe deposit boxes full of cash denominated in many different currencies. These safe deposit boxes are located all over the world and each currency is held in a country where transactions are conducted using that currency.
For more than 200 years, investing in real estate has been the most popular investment for millionaires to keep their money. During all these years, real estate investments have been the primary way millionaires have had of making and keeping their wealth.
The trend started with buying a primary home and then other residences, usually for tenants. After buying some personal real estate, then they start buying commercial real estate like office buildings, hotels, stadiums, bridges and more.
Millionaires often have large real estate portfolios. Once they have established themselves as a buyer in the real estate market, real estate agents start bringing them deals, and they find it easy to obtain financing. Large investors have many millions of dollars tied up in real estate.
Real estate is not an investment to depend on for cash, but it is a lucrative investment in the long run and a tried and true investment for millionaires because they like passive income and find that real estate provides it.
Stocks and Stock Funds
Some millionaires are all about simplicity. They invest in index funds and dividend-paying stocks. They like the passive income from equity securities just like they like the passive rental income that real estate provides. They simply don’t want to use their time managing investments.
Ultra-rich investors may hold a controlling interest in one or more major companies. But, many millionaires hold a portfolio of only a few equity securities.
Many may hold index funds since they earn decent returns and you don’t have to spend time managing them. They also have low management fees and excellent diversification. Millionaires also like dividend-paying stocks for the passive income they provide. Of course, they are also interested in capital appreciation but, for some, that’s less of a concern than generating current income.
Private Equity and Hedge Funds
Unless you are a multimillionaire, you may not participate in a hedge fund or buy into a private equity fund. Public equity is well-known since its shares trade on stock exchanges. One of its advantages is its liquidity. You can readily liquidate your public equity or shares of stock.
Private equity funds, on the other hand, generally get their investments from large organizations like universities or pension funds. Investors of private equity funds have to be accredited investors with a certain net worth, usually at least $250,000.
Accredited investors can be individuals as well as organizations, but they are defined by regulations. In other areas, private equity funds do not have to conform to as many regulations as public equity does. Some of the ultra-rich, if they are accredited investors, do invest in private equity.
Hedge funds are not the same as private equity. Hedge funds use pooled funds and pursue several strategies to earn outsized returns for their investors. Hedge funds invest in whatever fund managers think will earn the highest short-term profits possible.
Commodities, such as gold, silver, mineral rights or cattle, to name a few, are also stores of value for millionaires. But they require storage and have a level of complexity that many millionaires simply don’t want to deal with.
Some millionaires, along with the ultra-rich, keep a portion of their money in other alternative investments including such tangible assets as fine art, expensive musical instruments or rare books.
Also, there are millionaires and the ultra-rich that have investments in intellectual property rights such as the rights to songs or movies. These can be very lucrative investments.
It is estimated that there are around 100,000 cryptocurrency millionaires out there with the majority holding Bitcoin. To try to make your fortune in cryptocurrency, you have to be willing to take on some risk, and many millionaires don’t have an appetite for risk.
You can take a small portion of a millionaire’s wealth and invest in one of the different cryptocurrencies. Plenty of people have become millionaires this way. Some have lost their money. More and more, cryptocurrency is becoming accepted as a legitimate investment that deserves a look when trying to accumulate wealth.
The Bottom Line
Millionaires have many different investment philosophies, so it’s difficult to generalize concerning where they keep their money. However, all of the above are legitimate investments for millionaires.
They have a desire for a reduction of their risk, so many prefer diversified investment portfolios. More than one of these investments can be combined to try to enhance wealth.