Money Management

Most billionaires don’t invest the way we do. Learn what hedge funds, family offices, and prime brokerages can do for elite investors. [[{“value”:”

Investing in stocks is something anyone can do. And thanks to the availability of free stock trading apps, it’s cheaper than ever for the average investor.

But not everyone invests in stocks the same way, and billionaires and the ultra-wealthy often use different stock-buying avenues than the rest of us. Here are a few unique ways billionaires buy stocks and one all of us have access to.

1. A family office

A family office is a unique wealth management firm that caters to billionaires and the ultra-wealthy. A family office may offer financial planning, investment management, tax expertise, and charitable giving opportunities.

These offices can be set up for a specific family and handle their finances exclusively, or cater to multiple high-net-worth families. People with a net worth of at least $50 million may choose a multi-family office, while individuals with a net worth of $250 million or more are likely to have their own family office.

With a family office, billionaires let someone else manage many aspects of their wealth, including buying stocks. But even within a family office, a billionaire can direct financial experts to purchase specific company shares.

2. A prime brokerage

A prime brokerage is a group of services offered to ultra-high-net-worth individuals (UHNWI) or hedge funds. These services include cash and securities lending, risk management consulting, custody of assets (holding securities), and making introductions between clients and investors.

A billionaire may use some or all of these services, but for buying stocks, they may use a prime brokerage specifically to borrow securities for short selling (making money from stocks when they go down) or borrowing large amounts of money to buy stocks on margin.

Large financial firms, including Goldman Sachs and Morgan Stanley, offer prime brokerages. The minimum amount a client must have to use a prime broker is $500,000, though it’s not uncommon for clients to have $50 million in assets.

3. Self-directed brokerage account

This option is for billionaires who want to do all of their investing themselves. A self-directed brokerage account is the same kind you or I might use and has the same types of stock investing options, including individual stocks, exchange-traded funds, options trading, mutual funds, bonds, and real estate investment trusts (REITs).

There’s usually no minimum amount of money needed to open a self-directed brokerage account. Some billionaires may use this account because they enjoy researching companies and making stock picks, maintaining investment privacy, managing their own risks, and the low fees that are associated with these accounts.

4. Private placements

Sometimes, private companies sell shares of their company to a select group of investors. These are called private placements, and most of the time, the shares are sold to investment banks or hedge funds.

But UHNWIs, including billionaires, may also be invited to participate in private placements. This allows them to own shares in companies that the average investor can’t yet purchase. There are restrictions typically placed on the shares, including a lock-up period in which the shares aren’t allowed to be sold.

While you don’t necessarily need to be a billionaire to invest in private placements, individuals usually require a minimum net worth of $1 million, or at least $200,000 in earned income. Companies also decide who gets access to buy shares in the private placement, so even if you have the money, you may not be able to purchase the stock.

5. Hedge funds

Billionaires have access to another investment avenue, called hedge funds, that the average person doesn’t. You can invest in a variety of things through a hedge fund, including individual stocks, land, commodity futures, bonds, and currencies.

While hedge fund investing goes far beyond stock investments, the types of equity investing within hedge funds may include traditional buying and selling of stocks, shorting stocks, using algorithms to quickly buy and sell equities based on statistical models (called quantitative hedge funds), or buying stock in bankrupt companies or during company mergers and acquisitions.

Hedge funds are often far riskier than investing in a mutual fund, and they are exclusively for people with at least $200,000 in income or $1 million in net worth. They also charge high fees, including an annual asset management fee equal to 1% to 2% of the amount you’ve invested and a 20% performance fee of the hedge fund’s profit.

Thankfully, you don’t need a lot of money to start investing, and you certainly don’t need to be a billionaire. Many brokerage accounts have no account minimums, no fees for buying and selling stocks, and are designed for beginner investors instead of experts.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

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Gearing up to file for your 2023 taxes? Read on for one way to stay out of trouble with the IRS. [[{“value”:”

Tax season is now underway. And whether you’ve just started to gather your paperwork or are almost ready to file your taxes, there may be the nagging fear in the back of your mind that your return is going to wind up on the IRS’s audit list.

In reality, tax audits aren’t always such an ordeal. Most of the time, when the IRS audits you, all you really need to do is submit documentation backing up your claims. The idea of an IRS agent coming into your home, ransacking your office, and grabbing your bank account statements before you can shred them is something you might see play out in a movie, but it’s unlikely to happen in real life.

Still, you may be eager to get through the tax-filing process without an issue. And following one simple move could make that possible.

Be honest and accurate with your taxes

Mark Steber, Chief Tax Information Officer at Jackson Hewitt Tax Services, has been in the tax business a long time. And he says that if you want to avoid trouble when filing your taxes, being honest and accurate is the way to go.

“I see many people assuming if they’re ‘close enough’ that it won’t cause any issues,” Steber says. “But that couldn’t be further from the truth. Accuracy matters. This is especially true when reporting income.”

There are two areas where you have the potential to be dishonest and inaccurate when filing a tax return:

Your incomeYour deductions

As far as your income goes, keep in mind that whether it’s interest from your bank or freelance wages, those details are usually documented in a 1099 form. When you get a 1099 form, so does the IRS. So if you’re thinking of hiding the $800 you got for a freelance project you did last June, think again. There’s a good chance the IRS will find out you earned that money, so you might as well report that income accordingly.

Similarly, it’s OK to claim deductions on your tax return that are accurate and legitimate. If you’re a freelance web designer and you bought a new laptop for work, go ahead and claim it. But don’t guess at that deduction and claim $1,200 when the laptop cost $1,192. Instead, find the receipt and report the correct number.

Also, don’t say that a given expense was business-related when it wasn’t. If you take a trip to visit a friend across the country, don’t claim your flight and hotel room as a business expense. If the IRS asks for documentation of your travels, you could be in for a world of trouble.

A good way to avoid a hassle

Getting audited isn’t the end of the world. But if you can avoid it, why not?

One of the easiest ways to avoid an issue with the IRS is to file a return that’s truthful and spot-on. And if you’re still not convinced, remember that if you do decide to blatantly lie or guess at deductions, you’re likely to get caught. And that could result in costly penalties you’d no doubt rather avoid.

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Savings accounts have their benefits but also their pitfalls. Read on to see if there’s a better place to put your money this year. [[{“value”:”

There’s a benefit to putting money into a savings account. Savings accounts are very flexible, allowing you to access your funds whenever you need to. Also, your principal deposits are protected as long as they don’t exceed $250,000 and your bank is FDIC insured. For a joint account, this limit rises to $500,000.

But savings accounts also aren’t perfect, and there are a couple of drawbacks to using one. Here are some pitfalls you might encounter with a savings account — and how to get around them.

Downside No. 1: Your interest rate isn’t set in stone

You might put money into a savings account at a time when its APY is 4.00%. But in four months from now, your account’s APY could fall to 3.50%, which means you’re then earning less interest on your money.

Solution: Open a CD instead

CD rates are set in stone. When you open a CD, you’re guaranteed the interest rate you sign up at for the duration of your CD’s term.

The Federal Reserve is expected to cut interest rates at some point in 2024. Once that happens, the APY on your savings account is likely to drop. You can avoid losing out on interest income by putting your money into a CD. You may, in fact, want to lock in a longer-term CD — say, one with a term of 48 or 60 months — in anticipation of rates falling over the next few years, which may happen given how elevated they are today.

Downside No. 2: Your interest income will result in a tax bill

The interest income you earn in a savings account is taxed as ordinary income, which means it’s taxed at the highest rate you’re subject to based on your marginal tax bracket. If you earn a lot of interest in a savings account this year, you may end up with a smaller tax refund in 2025. You might even have to write the IRS a check.

Solution: Put money into a Roth IRA and invest it

If you’re saving your money for retirement purposes, opening a Roth IRA is a great way to get out of paying taxes on your gains related to that money — in the near term and the long term. Roth IRAs allow you to invest your money in a tax-free manner. You can contribute up to $7,000 this year if you’re under 50, or $8,000 if you’re 50 or older. Roth IRAs have a variety of investment options, including CDs and bonds.

Let’s say you put $5,000 into a Roth IRA this year and it eventually becomes worth $20,000 over time. You won’t have to pay taxes on that $15,000 gain — ever.

Savings accounts are convenient. And they’re the absolute best place for your emergency fund. But if you prefer a savings option with a guaranteed interest rate, a CD could be a better bet. And if you don’t like the idea of having to share your profits with the IRS, then you may want to look at a Roth IRA instead.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has nearly tripled the market.*

They just revealed what they believe are the 10 best stocks for investors to buy right now…

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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If you’re going to have a flight mishap, it’s better if it happens after your vacation. Learn why one writer considers $118 for lounge access to be a good value. [[{“value”:”

Picture this: You’re ready to go home from an amazing vacation, and you need to be at the airport by 5:30 a.m. to check your bags, get through security, and wait for what you think is a morning flight. Only, when you pull up the airline’s mobile app to access your reservation, you see that your flights have been changed — and you now have 10 hours to kill in the airport.

This happened to me a few weeks ago, and since I work here at The Ascent, I knew what to do — ask the check-in clerk if there was an airport lounge handy. There was, so my travel companion and I headed there to buy day passes. Here’s how it went — and why the money I spent was worth it.

Ah, that’s better

Once I got over the shock and vague dismay of learning that I was missing out on sleeping in and one last beach walk, I was glad to pay for day passes and settle into the lounge. My travel companion and I found comfortable seating, robust wifi, electrical outlets aplenty, and nicer restrooms than out in the main airport terminal.

And the food was really a big draw — our day passes got us access to everything available, including generous buffet offerings for breakfast and lunch, as well as various snacks available all day. Coffee, water, tea, juice, and other beverages were on tap. Plus, the lounge had a full bar, and simpler drinks were included — a gin and tonic tastes even better when it’s one you didn’t have to pay for separately.

Was it worth the price of admission?

I paid $59 each for my travel companion and I to get access to the lounge, and since we turned up at 6 a.m. when it opened and remained until a little after 3 p.m., I can absolutely say that the price I paid was worth it. Breaking that down, it cost about $6.55 per person per hour. And I more than earned back the cost by getting in a full work day — plus I was able to catch up on email and Slack, netting me opportunities for future work. That’s a personal finance win, no matter how you slice it.

I certainly could have done some work in the main terminal area of the airport, but I doubt I would have been as productive. Electrical outlets are not guaranteed in airport terminals, and while some have workspaces with tables, competition for these spots is fierce (and if I had monopolized one with my laptop for the entirety of a day, I’m sure I would have caught some dirty looks).

Plus, airport terminals are loud — people are gathered by their gates having conversations, and kids do their best to amuse themselves while waiting. Announcements over loudspeakers are constant, and some airports even play music at top volume over everything (JetBlue terminal at JFK Airport, I’m looking at you).

And regular airport food isn’t bad, but it is expensive. I paid $4.50 for a blueberry yogurt in an airport shop on my first flight out when I left for my vacation — that same yogurt costs about $1.50 at my local grocery store. I certainly wouldn’t have been willing to pay for the quantity and variety of food available to us (not to mention alcoholic drinks) in the lounge had we spent the day in the regular terminal. So yes, in my estimation, the price of admission for the United Club was worth it.

Is lounge access worth paying for more than once?

This was a special circumstance — I’ve run into flight mishaps before, but I’ve never spontaneously found myself with 10 hours to kill in an airport. If I were a frequent flyer, I think my experience with this lounge would guide me to explore my options for airline credit cards.

Many of them come with lounge access, and since a lot of these cards also charge an annual fee, it’s a good idea to use as many of the benefits as you can. In my case, I used my favorite travel credit card to pay for admission, so at least I earned a higher points rate on my spending that way.

Lounge access can be a great way to make lemonade out of airport lemons (and you know those lemons cost a lot more than grocery store ones). I’m happy I sprung for it, and I probably wouldn’t hesitate to do so again, were I to find myself with multiple hours before my flight.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has nearly tripled the market.*

They just revealed what they believe are the 10 best stocks for investors to buy right now…

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*Stock Advisor returns as of February 12, 2024

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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You may want to gear up for a smaller tax refund this year, just in case. But read on to find out why that’s not such a bad thing. [[{“value”:”

At this point, some people have already filed their 2023 taxes. And if you noticed that your refund this year is smaller than it was last year, you’re in good company.

As of Feb. 2, the average tax refund this tax season was $1,395. But around the same time last year, the average tax refund was much higher at $1,963.

To be fair, we’re only a few weeks into the 2024 tax-filing season, so this year’s refunds may catch up to last year’s as more tax returns start rolling in. But here’s why your tax refund may be smaller this year than in 2023.

When your income rises

If you earned more money in 2023 than you did in 2022, then you may be in line for a smaller tax refund this filing season. But those earnings don’t necessarily have to stem from a job.

One interesting and positive thing that happened in 2023 was that banks started to pay more interest in savings accounts and CDs in the wake of the Federal Reserve’s string of interest rate hikes. But you may not realize that interest income is taxable.

Not only do you have to pay taxes on the interest you earn from a savings account or CD, but in that case, you’re charged your ordinary income tax rate — meaning, you’re taxed at the highest rate possible based on your bracket.

As a reminder, the U.S. tax system is a marginal one, where your highest dollars of earnings are taxed at a higher rate than your lowest dollars of earnings. For example, if you’re single, earning $50,000 this year, your earnings above $47,151 will be subject to a 22% tax rate. Lower earnings will be taxed at a lower rate.

But interest income is taxed as unfavorably as possible. So if you earned a lot in your bank account last year, it could result in a slashed refund.

A smaller refund isn’t necessarily a bad thing

The idea of a smaller tax refund may be upsetting. But one thing you should realize is that a smaller refund means you let the IRS hang onto less of your money in 2023.

When you get a refund, the IRS isn’t giving you a gift. It’s simply returning money of yours it kept from you previously.

So let’s say you got a $900 tax refund in 2023 and are only looking at a $600 tax refund in 2024. You might think you’re losing out on $300. But in reality, what happened was that you didn’t let the IRS keep $300 of your earnings last year when you were entitled to that money.

Of course, a smaller tax refund can be a blow if you count on a larger sum to do things like cover bills and pay off debt. In general, it’s best not to make financial plans around a tax refund since it can be difficult to know what that sum will amount to. But still, if you’re looking at less money back from the IRS this year, there are different ways you can cope.

One option is to pick up a side hustle and boost your income that way. You could also take inventory at home and try to sell some unwanted items for extra cash. Finally, simply cutting your spending a bit could free up extra money for essential bills.

There’s no guarantee that your tax refund will be smaller this year than last year, so don’t assume that will be the case for you. But given that the average tax refund is already notably smaller this year than last, it’s a possibility to prepare for.

Your best bet, though, is to file your 2023 taxes as soon as possible. That way, you’ll know for sure how much money to expect back from the IRS. And from there, you can adjust your financial plans accordingly.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has nearly tripled the market.*

They just revealed what they believe are the 10 best stocks for investors to buy right now…

See the 10 stocks

*Stock Advisor returns as of February 12, 2024

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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