The source of income of rich people may surprise you. From investment income to successful entrepreneurship, there are many ways that the wealthy build their fortunes. Let’s explore the sources of income of rich people and get insight into their investment philosophy and more.
The ultra-rich, often regarded as the top 1% of society, enjoy a lifestyle that most of us can only dream of. They own multi-million-dollar mansions, private jets, and yachts. They seem to have an unlimited amount of resources to indulge in their passions.
But how do they acquire this wealth? What are the sources of income that propel them to such heights? In this article, we will explore the various sources of income of the ultra-rich.
Through this exploration, we hope to gain a better understanding of how the ultra-rich manage their finances, and perhaps glean some insights that can benefit us in our financial journeys.
It is estimated that the average sources of income of rich people are business (45%), investment (30%), high-paying profession (5%), and entertainment (5%). About 15% get their income from the wealth they have inherited.
Now, let us get into the details right away.
Source #1: Business ownership and entrepreneurship
Many ultra-rich people have built their fortunes through business ownership and entrepreneurship. According to Forbes, 66% of billionaires’ net worth comes from their ownership of private businesses.
The mindset of an entrepreneur is key to their success. They are willing to take risks, think creatively, and have a relentless drive to succeed. As billionaire entrepreneur Mark Cuban said, “It doesn’t matter how many times you have failed, you only have to be right once.”
Examples of successful business owners and entrepreneurs include Jeff Bezos, founder of Amazon, who has a net worth of over $170 billion. Elon Musk, CEO of Tesla and SpaceX, with a net worth of over $200 billion. Mukesh Ambani, Chairman of RIL, has a net worth of around $96.4 billion.
Some useful data about business:
- Business: According to a report by Wealth-X and UBS, about 55.8% of the world’s billionaires have made their wealth through entrepreneurship or business ownership.
- Top Industries: The same report found that the top three industries for billionaire entrepreneurs were technology, consumer and retail, and real estate.
- Top of The Pyramid: There is a study by the National Bureau of Economic Research. It says the top 1% of income earners are much more likely to be business owners or entrepreneurs.
Overall, business ownership and entrepreneurship is the top source of income for rich people. People who are willing to take more risks can start a business venture to become rich.
Source #2: Investments
Investment income is one of the main sources of income for ultra-rich people. While most people may invest for their future or retirement, the ultra-rich have a different investment philosophy altogether. They invest primarily for income. They also invest for capital appreciation, but they often use investments as a way to generate passive income.
Investment Philosophy of Ultra-Rich People
The investment philosophy of the ultra-rich is different from that of regular investors. Unlike most people, who invest primarily to save for their future or retirement, the ultra-rich invest primarily for income and capital appreciation.
According to a report by UBS, “most ultra-high-net-worth investors are primarily concerned with generating income from their assets, rather than just growing them.”
This report also states that “many of them have reached a stage in their lives where they have accumulated significant wealth and are more focused on preserving and maintaining their assets rather than chasing higher returns.”
Preferred Investment Options
Ultra-rich people have a wide range of investment options to choose from, but some options are preferred more than others.
According to a report by UBS, the investment allocation of ultra-high net worth individuals (UHNWIs) is as shown below:
A mix of these investments offers a better risk-return balance.
Use of Investment Income
Ultra-rich people not only invest for capital appreciation but also for generating income.
According to a report by Credit Suisse, “the wealthy typically receive a much larger proportion of their income from investment returns than the rest of the population.”
The report also states that the ultra-rich tend to reinvest a significant portion of their investment income back into their portfolios. But they also spend a considerable amount of it on luxury goods and experiences.
Examples of Ultra-Rich People and their Investment Income Sources
Some well-known ultra-rich people and their investment income sources include:
- Warren Buffett: He earns most of his income from his investment in his company called Berkshire Hathaway. Buffett’s shareholding is about 38% in Berkshire. The total net worth of this company is about $700 billion.
- Elon Musk: His main source of income is his business and investments. He is the largest shareholder (about 22%) in his company Tesla. He also has investments in Paypal, SpaceX, DeepMind, and The Boring Company. He also has a large investment in Bitcoin.
- Late Rakesh Jhujjhunwala: His main source of income was his investments in different companies. Some of his major investments include his shareholdings in Titan, Crisil, and Lupin.
According to a report by Capgemini, real estate is the most preferred asset class among the ultra-rich. The report states that real estate is seen as a tangible and stable asset. Furthermore, as it can generate rental income and long-term capital appreciation it is preferred by rich people.
Source #3: High-paying professions
High-paying professions are also a route to riches for some ultra-rich people. Let’s shed some light on some high-paying professions that are known to generate significant wealth.
Business Executives and Managers:
There is a report by Wealth-X, a leading global wealth intelligence, and market research firm. It says that business executives and managers represent the largest group of ultra-high net worth (UHNW) individuals.
The average net worth of these executives/managers is about $30 million. Almost one-third of all UHNW individuals come from this group. The pay packages that these individuals received for their service give them their UHNW status.
Lawyers are also known to earn significant amounts of money. It is especially true for those who specialize in areas such as corporate law or litigation. According to a report by Forbes, some of the highest-paid lawyers in the world earn millions of dollars per year.
Ram Jethmalani was a renowned Indian lawyer and politician who passed away in 2019. Some reports suggest that his fees for a single appearance in court could range from Rs. 25 to Rs. 50 lakhs. In some high-profile cases, his fees were reported to be even higher, reaching up to Rs. 1 crore.
Medical professionals are also among the top earners in many countries. For instance, specialists such as neurosurgeons, orthopedic surgeons, and cardiologists are known to earn over $400,000 per year on average in the United States.
Dr. Naresh Trehan is a renowned cardiologist and cardiovascular surgeon in India. As per sources, the cost of a complicated heart surgery performed by Dr. Trehan can be 15 lakhs ($20,000). The charges can be more depending on the complexity of the procedure and other factors.
Investment bankers are another group of professionals who earn substantial amounts of money. They are responsible for advising companies on mergers and acquisitions, raising capital, and managing investments.
Prashant Jain is the Chief Investment Officer at HDFC Mutual Fund. Reports suggest that his compensation package is approximately Rs.30-40 crore (around $5 million).
Management consultants are experts who help businesses improve their performance by analyzing their operations and suggesting solutions.
According to data from Glassdoor, management consultants earn an average of $85,000 per year in the United States, with top earners making over $200,000 per year.
A few well-known management consulting firms in India are McKinsey & Company, Boston Consulting Group (BCG), and Bain & Company.
Source #4: Entertainment
Entertainment is a highly lucrative industry that has produced many ultra-rich individuals. From actors to musicians to athletes, these individuals have found success through their talent and hard work.
According to Forbes, the world’s highest-paid entertainers earned a combined $6.1 billion in 2021.
Here are some of the ways that ultra-rich people in the entertainment industry earn their money:
- Acting: Many actors earn a high income through their work in film and television. Top actors can earn multiple crores per movie. Even supporting actors can earn a substantial income. The highest-paid actor in India is Akshay Kumar, with an estimated annual income of $48.5 million (Forbes, 2020).
- Music: Musicians can earn a significant income from album sales, touring, merchandise, and endorsements. The highest-paid musician in India is A.R. Rahman, with an estimated net worth of $280 million.
- Sports: Professional athletes can earn a high income through their contracts, endorsements, and prize money. Forbes says, the highest-paid athlete in 2021 was Conor McGregor, who earned $180 million in a year (2020-21). The highest-paid Indian athlete is Virat Kohli. He earned an estimated $28.7 million in the year 2020.
- Comedy: Comedians can earn a substantial income from touring, stand-up acts, and television appearances. The highest-paid comedian in India is Kapil Sharma. As per reports his net worth is about Rs.336 crores and his monthly income is Rs.3 crores. He charges about Rs.50 lakhs per episode for The Kapil Sharma Show.
- Social media: Social media influencers, including YouTubers, TikTokers, and Instagram stars. These stars can earn income from brand partnerships and advertising. The top Indian influences and their reported net worth are Prajakta Koli (net worth of Rs.16 crore) and Kusha Kapital (net worth of Rs.20 Crore). It is said that Varun Aditya charges about Rs.8 lakhs for his sponsored posts.
Overall, the entertainment industry offers a variety of high-paying professions for those with talent and drive.
The source of income of rich people varies widely. Some rich people earn their fortunes through traditional avenues like real estate, stocks, and inheritance. Others may have built their wealth through entrepreneurship, tech ventures, or entertainment.
The ultra-rich tend to invest heavily in real estate and stocks, with a growing interest in private equity and venture capital. While there is no one-size-fits-all answer to how the rich make their money, their preference for equity and real estate is clear.
New industries such as technology and e-commerce have opened up more opportunities.
Overall, understanding the source of income of the rich can provide valuable insights. It acts as an inspiration for those who aspire to achieve financial success. By learning from the habits and strategies of already rich people, we can gain a better understanding of what it takes to accumulate wealth in today’s world.
A Key Point
Rich people never underestimate the importance of diversification in their income sources. Most ultra-rich individuals have multiple streams of income. They are not solely dependent on one source. This diversification helps them mitigate risks and maintain their wealth. In case one source of income faces challenges, they have other sources to take over.
To exemplify this fact let’s take the example of Shah Rukh Khan. Apart from being a big movie star, he has also diversified his income streams. He co-owns an IPL Team (Kolkata Knight Riders). He also hosts TV shows and does endorsements for various brands. These additional income streams have helped him build a net worth of over $750 million. He is one of the richest celebrities in India.