How Billionaires Fund Their Lifestyles

Have you ever wondered how Elon Musk, Jeff Bezos, Mark Zuckerberg and other CEOs of major tech companies fund their lifestyles?

When you hear that Elon Musk is worth $200 billion, the majority of that net worth is tied to his ownership stake in Tesla which comes in the form stock. After all he does not receive any annual salary in the traditional sense. This is the case with most other CEOs of major tech companies, Mark Zuckerberg receives an annual salary of $1 for his role as CEO of Meta.

I suppose most would say they simply sell their stock to pay for their lifestyle but that is not quite the case either.

Most high ranking tech executives realized that their company's stock appreciates significantly in perpetuity, so it doesn't make sense to sell it. The most ideal strategy to optimize their net worth is to take out a loan against their holdings. In the financial world this is commonly know as margin loans.

Margin loans are simply loans issued using stock holdings as collateral. The average joe who owns stock can use his stock holdings as leverage and get this type of loan but the terms won't nearly be as favorable. During the pandemic when interest rates were at record lows, JP Morgan was allegedly offering margin loans at 3% if an investor had a portfolio worth over $1 million, and 0.87% if an investor had a portfolio worth over $100 million. Keep in mind these big tech CEOs have stock holdings worth billions if not hundreds of billions of dollars and at this level financial institutions create custom arrangements and alternative financing methods catered specifically to each individual.

Lets walk through a hypothetical mathematical example:

Jeff Bezos needs $1 million to fund his lifestyle for the year. He walks into JP Morgan and requests a loan against his Amazon stock. The executives at JP Morgan realize his holdings are worth $100 billion. They offer him a loan at 1% interest. Assume he must also repay 1% of the principal a the end of each year.

Bezos can either sell $1 million worth of stock, or he can take a loan for $1 million against his stock.

1% of $1 million is $10,000. Say he chooses to take out the loan, and at the end of the year he owes the interest of $10,000 and an additional 1% of the principal as per terms of the loan. 2% of $1 million is $20,000.

Assume that over the coarse of the year Amazon stock appreciated 10%. Jeff Bezos saved $80,000 by choosing to take the loan. He needed $1 million, he paid $20,000 to use it, and by choosing to hold onto his $1 million worth of stock he made $100,000. He was $80,000 better off by not selling his shares.

Now the situation won't always play out like this, some times stocks go down, but if you look at the overall stock performance over the history of a company's life they overwhelmingly move upward. CEOs have intimate knowledge of their company and can often gauge whether the company's share price is overvalued or undervalued. If the stock is overvalued they may sell more shares and borrow the rest or vice versa if its undervalued they may choose to sell a smaller amount of shares (if any at all) and borrow the majority of the funds needed.

This strategy has proven to be quite effective for CEOs of major companies and has allowed them to substantially increase their net worth simply by holding on to the stock of their own company.