At some point, I’m sure you have heard somebody mutter something along the lines of how “the wealthy hoard their money”. The point of this short article is to explain why they most certainly do not.
The term “hoard”, conjures up images of Scrooge McDuck swimming through his room full of coins. However, I am convinced that Scrooge inherited his wealth from parents who never bothered to explain to him how to manage money. No sane wealthy person simply leaves their money in a room, without putting it to work. If they did this, their wealth would shrink by the day.
This is because we live in a time of inflationary money. Simply put, this means that the supply of money is ever increasing and as a result, its value is perpetually being eroded. To combat this, we invest our money in order to generate a return. The minimum goal is to keep up with inflation, to ensure that the purchasing power of our money at least remains constant over time.
When somebody says that wealthy people hoard their money, they are suggesting that wealthy people are removing their money from the general economy, where nobody is able to access it. Including the owners! Wealthy people don’t just sit on their money, they spend it in a variety of ways. This includes investing it.
Wealthy people (actually most people, not just the wealthy), invest their money in a variety of ways. The simplest would be putting it in the bank or money market. This money is then loaned out by the bank to other people, who use it to start businesses or spend it in the economy. The interest on these loans goes back, in part, to the investor. Thus the investor is indirectly putting his money to work in the general economy, allowing those with less capital to make use of the surplus capital that he has accumulated.
Other types of conservative investments would be those found on the bond market. Investors purchase corporate bonds, which are a way for companies to raise capital. This capital is used to expand the operations of the enterprise, which means greater levels of employment in the economy at large.
A third way that an investor may put his money to work is by investing it into his own business, to increase production. Once again, this leads to more jobs and greater economic activity.
So wealthy people don’t hide their money under their mattresses, they put it to work in the greater economy, through a variety of financial instruments. Their money is being used productively by other people in the economy, who then pay them interest for the ability to use the capital. This is the cornerstone of both an expanding and efficient economy. It allows young people who have no assets to utilise the assets that the older generation has accumulated over time, to build greater levels of economic activity. This is one of the reasons why, in a free market economy, successive generations have a higher standard of living than those before them.
The investments of wealthy people are thus the lifeblood of any economy and should be celebrated.
The economist Milton Friedman put it best in the video below:
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Ricki specializes in the field of wealth management with a focus on holistic financial planning. He has a keen interest in the investment fields of property, technology, precious metals and cryptocurrencies. Ricki also holds a Masters degree in Science from the University of Stellenbosch.
Important Risk Notice:
Crypto Currencies are not defined as securities in terms of the Financial Markets Act, 2012 (Act No. 19 of 2012). The regulatory standards that apply to the trading of securities, therefore, do not apply to virtual currencies. Because virtual currencies are not regulated, users are not protected and are at the risk of losing money. Transactions are also irreversible. The price of virtual currencies is based on investor sentiment and can rise rapidly, thus attracting investors looking for very high returns from investments. However, the prices of virtual currencies tend to be very volatile and can drop as quickly as they rise. This may encourage speculative behaviour, which in turn spurs more volatility. Financial risks are, therefore, limitless and claims cannot be made for such losses.