Millionaires Who Are Frugal When They Don't Have to Be
nytimes.com
nytimes.com
The word "million" is deceptive because it is an amount beyond what 99% have. It makes it seem like some mind boggling amount of money but mathematically, it really isn't that much. A person classified as "millionaire" could be tagged that because of total net assets and not the liquid cash in a bank account. E.g. a $500k house + $500k IRA/401k + $25k car is a "millionaire".
But let's say you have a multi-millionaire (e.g. 2 million dollars). That might be $1 million in cash in the bank. That's still not much money because:
- it's not enough to park $1 million of principal into risk-free US T-Bills and live off the current interest rates of < 1%. That's only $10k income per year which is less than minimum wage.
- if your child gets an expensive health problem like leukemia or spouse gets cancer, your medical bills could blow past the lifetime cap of the health insurance policy and therefore, you have to drain your savings to pay for expensive treatments.
- non-Ivy League schools can cost $50k per year. If you have 2 children and you want to give them the gift of college education without being burdened with student debt, that's at least $400k. And to stay at $400k, it would require the parents to be "cheapskates" and not fund any extracurricular trips like ski vacations and Spring Break parties down in Mexico.
The millionaires that have less than $10 million definitely have to be "frugal" and watch their money. Consider than NBA star Allen Iverson earned $200 million and blew it all away.
At $100+ million, one can start getting frivolous and maybe buy a Ferrari. However, $2 million is not enough cushion to live off interest income and be 100% worry-free from unexpected life events. One would still have to work somewhere to keep adding to the nest egg.
In particular, he provides some evidence that it's safe to spend 3-4% of your assets every year, indefinitely, if you invest in index funds. That means that it's enough to safe about 30 times your annual expenses. For me, that would be around 650000 Euros. A million certainly would cover this, and have something left over for extreme crisis.
I think it is nice if you can provide your children some security, but I do not think that your savings have to be at the highest level when you die.
I come from a country where college education is free and healthcare is not capped. I do have to worry about dental care beyond the basics, though.
If you can buy the thing in cash, out of pocket, without depleting more than half of your liquid savings... sure, why not. If on the other hand you buy on credit, you are making a commitment against future earnings, that are in no way guaranteed to match or surpass current earnings.
More over, if you make and habit of indulging in anything you happen to fancy, you have no guarantee that other frivolous expenses won't come before you actually finish paying this one. However its other (many) flaws that's one point that Kiyosaki's "Rich dad, poor dad" gets absolutely right: A large income is irrelevant if you inflate your lifestyle even more.
> it would require the parents to be "cheapskates" and not fund any extracurricular trips like ski vacations and Spring Break parties down in Mexico
One would assume a 'frugal' household knows better than that and would want to pass their value system on to the next generation too. Want to get wasted in Mexico? Find a way to make it happen yourself.
If I had $10,000,001.00 in the bank, I personally would not feel secure enough to spend $300k on a car (and also pay all the expensive maintenance that it entails.) Since the car is 3% of my available funds, I'd be constantly hyper paranoid about a stray rock being kicked up by the truck in front of me.
If I had $100 million, the $300k car would feel a little more "disposable". If a runaway shopping cart dings it, I'd just shrug it off and buy another one and donate the imperfect one to my landscape gardener.
On the other hand, Elon Musk bought a $1 million Mclaren F1 after the 1999 zip2 sale netted him ~$20 million. Like I said, everybody's risk profile is different and most people including me do not think he's fiscally irresponsible.
I think the nuance that's getting lost in translation is my idea of "affording" to buy an exotic car. Yes in mathematical terms, $10 million subtracting $300k leaves plenty left over so one can buy without requiring a loan and still be "wealthy."
However, my idea of "afford" also includes the state-of-mind after one pays for it. I'd like the luxury of not giving the super car no more thought than a Toyota Camry. If I'm paranoid about the car, I can't "afford" it no matter what my bank account says. The car is ruling over me instead of the other way around. The cost of ownership is too high (this includes "mental costs"). The threshold isn't "how much money I need to buy the car without a bank loan" but "how much money so that the car feels disposable."
You misunderstood what I'm saying if you think $10 million to $9.7 million is some kind of reduction in self-esteem. That's not the point.
It's not the absolute $ amount. It's a subjective sense of the magnitude of payment in relation to what I get in return. The calculus includes the mental state.
In my 20s, I spent $500k on a music studio thinking it would earn multiples of that. Things didn't pan out that way but I'm still young enough not to be gun shy about spending large amounts of money. I'm just a little wiser now and won't be throwing money away at such endeavors.
Today, if I came across a web startup I believed in and they need $900,000 (3x the $300k of Ferrari), I'd feel compelled to reduce my bank account to $9.1 million to see if my angel investment will work.
With the Ferrari, the ownership of it also includes many headaches in addition to whatever pleasures I could derive from it. The pleasures are seriously curtailed in my city where I couldn't floor it and race it above 80mph.
On the other hand, with the killer web startup, I would lose sleep at night if I missed the chance to invest so in that situation, I must spend $900k just to have some piece of mind. Mathematically, I'm "poorer" at $9.1 instead of $9.7 but I feel better. Maybe the startup will crash & burn but I spent the money hoping they could change the world.
Here's the crazy thing: it's very possible for someone else to think of the Ferrari as the "sure reward" and the web startup investment to be a fool's game. We all have different risk profiles.
In the first comment you argued differently. You said, that that even most millionaires can not afford to buy a sports car. I would say, that a single startup investment outside of any investment plan is an even higher luxury. It is comparable to spending thousands of dollars in Vegas.
A Ferrari loses some of its value, in exchange you get fun. A startup will most likely fail completely. Additionally a Ferrari is much easier to liquidate again.
And for the cost of a fully loaded BMW you can get a very nice classic. and probably buy a cheap ford for daily runabout even the gt500 super snake is fairly cheap.
What most folks don't recognize is that you can get significant leverage on savings, a solid income and a good credit score. In the case of a used exotic car, if you purchase the right make, model and year and negotiate a good deal, you can often drive the car for not much more than the total cost of, say, leasing a Mercedes. In some cases, you can even drive the car for a while for next to nothing.
They key is that you buy used, identify a good deal, put down as little cash up front as is possible (i.e. 10%) and extend the loan term out as far as you can (specialty lenders will do 72 to 120 month loans on exotic cars). If you hit the depreciation curve at the right time, you really can't lose.
You'd be surprised how many people who could pay cash for a $250,000 Ferrari still have a car note. There's really no good reason to pay cash outright in many cases.
http://www.hhs.gov/healthcare/rights/limits/
Take the case of cancer. Look at the list of essential services.
https://www.healthcare.gov/coverage/what-marketplace-plans-c...
I'm not sure where cancer is on that list, so I gather that cancer is not covered by the bare minimum essential services plans. From this, I believe it is incorrect to say ACA (aka Obamacare) requires coverage of unlimited cancer treatment.
Also, see this article:
http://khn.org/news/obamacare-lightens-load-for-cancer-patie...
It points out the key loophole in planning for unexpected catastrophic medical expenses is prescription medication, regardless of lifetime cap issues. Even if you can afford the annual copays and deductibles for the numerous office visits, the medication budget for treating cancer can easily blow out your budget planning by either not being covered at all, or only covered at a 50% level.
What makes this aspect especially hard to plan for is you currently have no way to find out in advance what these medications cost under specific plans. So if for example, you have a family predisposition to a certain type of cancer, then you have no way to find out how to financially plan for the possibility you might also get it, and have to start the medication for it.
In the US at least, I still firmly believe that prudently planning for severe medical conditions is simply not feasible, even with "catastrophic coverage", for families with less than $10M in liquid assets, and $40M in total assets.
If the lifetime cap is gone, some other issue will crop up such as an experimental (and very expensive) cancer drug is not covered by insurance but you want to pay out-of-pocket to try it.
Likewise we can withstand high deductibles and as a result obtain lower premiums on other sorts of insurance.
But: between being frugal and buying an overly expensive toy car, there's a lot of space. At $10m, you can spend $20k every month and it'll last you forever if you invest the rest in index funds at 3% or so. So a frugal lifestyle is uncalled for at that point, unless it's your personal way to obtain happiness.
> - if your child gets an expensive health problem like leukemia or spouse gets cancer, your medical bills could blow past the lifetime cap of the health insurance policy
The lifetime cap was one of the things eliminated by Obamacare afaik.
If we define "millionaires" as the individual with 1M of worth asset you are definitely right.
If we define "millionaires" as High-Net-Worth individual (HNWi), the people who have at least 1M in investable finance without counting the primary residence it start to get more interesting.
However, if we define "millionaires" as individual with a net profit of 1M in the last fiscal year, they DO NOT have to be frugal :)
There is a very high rotation on high income earners. They tend to ride temporary booms in whatever their specialty is (eg the real estate bubble days), and also peak out at a certain age bracket (their earning power peaks for only a few years out of a long career).
If you have this seven year peak earning power: $300k, $500k, $600k, $1m, $600k, $500k, $300k - you've yielded $3.8 million in earnings, paid a likely ~$1.5 million in total income related taxes, and have $2.3m left before life expenditures. You're 52 years old, and your earning power has peaked. You have $2.5 million in savings and investments. That has to last the rest of your life and retirement; you spend $10k per month in total life expenses, and have two children, and a decent house with a mortgage; your income will never be much higher than $300k again, and you're going to pay ~30% in income taxes on that.
That's closer to a normal scenario for a $1m earner, than the one where they just yield $1m per year for 20 years and never have a financial care in the world.
In truth, I'm a bit amazed by many of the HN comments. The materialistic stuff (ferrari bmw etc) has powerful symbolism to many. However, if you look at the article, it is mainly about those nearing retirement years.
Materialistic wealth loses a lot of appeal to those who are older and wealthier, many who realize that such things require care and feeding, and really end up owning you rather than the other way around. PG has a terrific essay about materalistic icons losing much of their appeal once you realize that you could easily purchase them; Not being able to have them is part of their mystique really.
The wealth of financial independence (defined as having enough to supply your burn for the rest of your life) enables you to do with your time as you please. Some great questions arise after achieving that kind of wealth, like "What do I want to do with my life?" It turns out that having-a-purpose is of great importance, and that might well appear to younger journalists like continuing to behave middle class.
Genuinely curious.
...“It’s (money) an important tool. They don’t neglect it, but they also don’t worship it.”...
...“Part of this pressure to keep going is less about greed and more about insecurity that might be self-imposed,” ...
...“It’s about paying attention to what makes you happy and not just doing what our society tells us to do,” ...
... he and his wife simply didn’t care that much about material possessions...
... “We like to travel, and we’ll spend the money for that because it’s worth it having a real experience together.” ...
And when I went through the comments here, I found none so far discussing on any of the points above.
But if you believe those quotes exhibit selflessness, you can just call me Charley 'Adolf' Manson: Paragon of Virtue. I've got a nice cult you can join. We've given up money, greed, and materialism.
Rather than letting falling to the all-too-common temptation to let luxury spending grow wildly with income, it's possible to set clear goals of financial independence, build habits that keep you on that path, and arrest the tendency to keep going on the hedonic treadmill.
I've found value in resources like Mr Money Mustache's blog for quantifying what actions are helpful to work toward financial independence: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
People who have lots of money, are good with spending money? and knowing the value of things?
I don't think they're cheapskates, they just know what ACUTALLY brings value to their life's. They probably wouldn't mind spending, if they get more or equal value from the thing they are purchasing.
Fancy Cars in general are terrible value, for the enjoyment they bring you. Unless say its your hobby.
Buying a brand new fancy car is a terrible investment for the enjoyment, but that doesn't need stop you from having one. The article makes the point that there are plenty of ways to have "nice" things without breaking the bank, even if you don't have $$Texas.
Frugal? Is this a joke?
In contrast, many lottery winners are bankrupt within 5 years. Why? They're "rich"! They can spend money like it's water! And they do... Then they run out.
As other commenters point out, a million dollars is money, but you still have to be careful. You probably still have to work.
You can go out for dinner three times a week at a reasonable restaurant and not worry about it. You can buy a decent car without it impacting your budget too much.
They're not penny-pinching. They're not part of the 47% of americans who'd have trouble raising $400 for an emergency expense.
But care-free? Nope.
One trip a year to Italy is probably $5K for two people. In comparison, that's like $50 for someone with $10K to their name. It's money, you likely have to plan for it, but it's do-able.
It's somewhat arbitrary, but for me, that's about $6,000,000 in 2015 dollars....
I'm sure most people here can understand the idea that sometimes fixing your own stuff can be fun, even if it's cheaper to replace it.
Also frugality is not about showing off, except among frugal friends comparing notes.
Another factor its that not advertising one's wealth is an inexpensive form of household security.
I still go to work everyday (unfortunately.) I'd rather work part time, 2-3 days a week as a contractor/consultant, then work on my own projects the rest of the time.
I often wonder how many others out there are like me... "working millionaires."
In any case, nice work!
http://www.wsj.com/articles/SB100014240527023043607045794151...
An omission of the article is that often frugal persons are generous to their loved ones and causes they care about.
Investing is the only way to build wealth. It's impossible to save your way to financial freedom. If you make an average of $100K per year from age 30-60, that's $3 million in income. Assuming about 35% in state, local and federal taxes, that leaves you with $65K per year. Now, you're saving 10% of that per year, that's $6,500 saved per year. With a 1% rate, at the end of 30 years, you have about $229K. Assuming you live to be 80, that's $229K that needs to earn enough to pay your bills. Even if you saved 20%, you'd still not even have $500K at the end of 30 years.
With the same 20% savings rate and some reasonably smart investing (12% returns,) then you'd end up with over $3.5 million over the same period. If that investing is in real estate, you could potentially earn that gain tax free (or tax reduced) because building depreciation percentages can generally exceed the "profit" from real estate cashflow. On top of that, a 1031 exchange means you can keep selling and trading up to larger and larger real estate without paying a capital gains tax, which means you build even more net worth that can then be leveraged to buy more properties. Most millionaires get there because of property, very, very rarely because they save their way to it. A typical middle-class wage doesn't lend itself well to saving your way to millions. The math just doesn't work, the tax code also doesn't support it.
Frugality isn't the key to success. The $30 you save by washing your own car is peanuts compared to the value of that time doing something more productive (like sourcing real estate or researching investments.) Frugality can actually cost you more money because of the time-value of money. But admittedly many of us have inherited our parents/grandparents' Depression Era, middle-class ethos. It's a classic example of Rich Dad Poor Dad.
Let's say the stock market, on average, loses 30-40% in a down year. On the other hand, you usually have 5-7 good years between crashes, where the market appreciates by 10-30% per year. Even if you can't liquidate your stock holdings 'when shit hits the fan', you'll still be making money.
Achieving a 20%+ return is realistic if you don't mind taking some risk (not crazy "seed fund a startup" risk, more like general business risk) and you make sure to minimise your taxes.
The stock market has been BOOMING for the last 5 years. I have a wealthy friend who told me his net worth doubled over the last 5 years. That's tens of millions in capital growth.
Frugality is a fine key to success, success being defined by Charles Dickens.[1] And keep in mind, before making a time-value-of-money argument, that time spent being productive, like researching investments, actually needs to be productive; it's not hard to go below the minimum wage if you aren't tossing around large amounts of money.
However, your tax assumptions are probably too high for the current environment. If you earn 100k gross, but max out your 401k and HSA, your net income after taxes will be close to 60k, but you'll already be saving 20k+ pre-tax.
Yes, you'll have to pay taxes on the 401k when you reach retirement, but if you're living frugally and only taking out a small amount, your tax obligations will be way less than 35%. Without breaking a sweat, my effective tax rate is under 16% and I'm in the range described.
Relative frugality (not being a spendthrift) is a necessary requirement for holding wealth. It is a key - not the only one - to gaining it.
Most generous person I know. He would give the shirt off his back if need be. Drives his wife nuts :)
my parents (in their 60s) have 2 lifetimes worth of savings and investments yet still do their own laundry, have a vegetable garden, mend their clothes.... but they drive nice cars, take expensive vacations, and buy tons of gadgets. they have a massive OLED TV that they watch stereotypical old-person shows on, yet still re-use their ziploc bags. this is not an either/or proposition. people are complex creatures, especially when it comes to money.
in other words they're just normal people, not overly or underly frugal. this entire article is confused. older people with $millions today have a huge diversity of backgrounds, philosophies, and lifestyles. it's impossible to capture some kind of over-arching rule. spending habits are usually a mix of contemporary attitudes and early life values.
if nobody spent any of their money our economy wouldn't work. the important thing is to be careful with your savings and investments - the goal isn't to be a complete cheapskate and die with every penny you ever earned. i can't think of a worse way to live.
i'll repeat myself. the people in this article have both, like most successful people in general. it's not a mutually exclusive choice. this article is basically not making any kind of point whatsoever. what's the thesis of the article? that most successful people don't blow all their money on bullshit like some poor people do? wow, what a revelation.
these people drive cars and take vacations and buy cartier watches. truly 'frugal' people usually don't do any of this stuff. for example, you don't have to look far on HN to find cheapskates that make professional salaries yet shun cars, live in tiny apartments, shop at garage sales, don't vacation, and live on dry foodstuffs. in fact i was poking fun at them in a comment i made just yesterday. i called it the 'cheapskate olympics'. i think that kind of lifestyle is absurd if you can afford to live a bit better than that.
I regard the article as inspiring to someone who wants to become successful later in life due to their wealth, despite a modest job history.
i invite you to take a look at a factory in the developing world (the people who are being lifted out of poverty) and see what they produce. i assure you it's not "high marginal value" goods like swiss watches, fixed gear bicycles, and midcentury modern furniture.
I'm not sure how much these people are struggling with their low spending.
The reality is that I usually see (in this order) an airport, a taxi, a conference room, a hotel dining room and/or bar, a hotel room, a taxi, an airport.
The idea that there is much downtime on a business trip is a fantasy of those who don't travel for work.
We paid 1/2 off for our car with a company perq and are having the company cover about 50k in expenses on a home were in the midst of purchasing.
You should take advantage of your opportunities more.
Buddy, the kinds of places I get to travel aren't exactly postcard-worthy.
On the rare occasion I get to travel to a "fun place" I do my best but I'm not living in Europe where everyone gets 12 weeks of vacation. I live in the USA where every moment I spend at leisure directly affects the amount of money I have in my pocket.
Google "opportunity costs" and you'll catch my drift.
I remember looking at this in Malaysia and one of the thing that put me off was the "servant" issue - the idea of having a servant was just creepy to me.
Just to be clear, they are not your servant, no matter the usage of the word, or how you see other people treating them. You define the relationship, and it is up to you to treat them the way you would treat other individuals. And above all else, they are an employee like any other (either yours, or the company's). Just because they work in your house, and do so in an ad-hoc fashion rather than for a set list of tasks does not mean it's different, i.e. it doesn't change the employer/employee relationship.
Its the same argument about working in pre Mandela South Africa.
Much of success is embodied in modeled behaviors and attitudes. By dint of employing them, you have the opportunity to model for them success-oriented attributes, and let them pick and choose what is culturally and socioeconomically prudent to adopt into their lives. If you want to go a more activist route, if you and they have children you can intertwine their lives together and sponsor (tuition, fees, clothing and supplies) their children (if they are young enough) to the international school and after-school activities that expatriates usually use, and give your children a cultural exchange education second-to-none in the process. The possibilities to make positive change are endless, and only limited by your resources. Just be careful of fostering dependencies, and be open with those who you partner with in the endeavor about the probability of you getting assigned out of your host nation and abruptly changing their situation.
By contrast, advocating against "facilitating apartheid with a brown face", through various political means at your disposal as an individual citizen in the developed world, helps to eventually effect change through policy circles, but usually only at a very long game timeframe. Typically in the years to decades scale.
We need BOTH kinds of advocacy to effect humanitarian change. But if you are already in a position to make a personal, first-person, actionable, on-the-ground change, I urge you to grab it with both hands; there are too few people in this world with your principles, perception, and opportunity. Whether you are facilitating apartheid or making positive change depends upon the deep nature of your interaction, not the overall first-blush official description of the relationships.
Very rarely is this kind of change a binary switch, and it almost always involves a "getting from Point A to Point B" transition that has the trappings of distasteful practices, but the on-the-ground reality for most individuals (even highly privileged ones like most of us on HN) is resources are limited, and we have to get creative with how we re-purpose (and overload, to borrow OO lingo) normal, everyday interactions with positive change payloads.
Unfortunately my plan to do the same for the Edinburgh fringe did not work out
Indeed, I was surprised how little time we had for anything except of working and sleeping.
Wealth needs to be redeployed back into the economy and it must be done in following a method that doesn't grow the wealth in an unnatural compounding way.
What you are describing is fractional reserve banking under a SINGLE or central bank. The United States Federal Reserve does this kind of lending to commercial banks deliberately to control the money supply. Actually, I'm not even sure if the federal reserve is required to maintain a reserve ratio (of federal notes to cash) at all. I think those federal reserve notes are literally created out of thin air.
The greatest contributor to wealth inequality in the last 40 years is the Federal Reserve debasing the currency that the middle class depends on (and since ~1970, they've been doing it at a very rapid clip). If your wages go up 2% per year, and inflation averages 3% per year, over 30 years your standard of living is going to get nuked. The super rich can manage inflation by shifting assets, everyone else cannot.
Yielding compounding returns on investments with little risk is gaining wealth for no work. That is unnatural.
What is more unnatural is when an obscenely rich person earns a million a year as a return on investments. A million dollars in wealth in one year is usually not equivalent to the output of one man. Multiple people must work together to generate that amount of GDP. So how does a rich man procure the wealth equivalent to the work of multitudes of people without contributing any work himself? He must do so in a way that is unnatural.
Dividends is wealth generated by laborers and taken by shareholder owners. Sitting on stocks and eating up dividends while contributing no work of your own does not cause money to circulate through the economy in a good way. What it does is it causes your own wealth to grow unfairly, further increasing wealth inequality.
Money is not wealth.
Money is not wealth.
What you spend your money on is wealth.
Sitting on a number in a computer file does not cause inequality.
When you spend your money on wealth, you are doing a trade or an exchange. Wealth for wealth. If money isn't wealth, why the hell would anyone give it away in exchange for empty paper? They don't. Because money is wealth. That's why when people have lots of it, we call them "wealthy"
Your being very naïve.
I have also been made redundant the hard way when a company went bust ie they hand been paying the social security so I could claim unemployment.
Are you still a student as your attitudes certainly indicate you might not have had to deal with the real world.
You still haven't answered how YOU running a company without access to capital makes ME niave.
Also look at how your comments on this thread have been treated.
Your english used the past tense "tried" indicating that it was something you did in the past. I think instead of me learning how to read english you should learn how to write it.
As for forming a company without capital. It's never been done, and I never suggested it was possible. Maybe you're the one who should learn how to read.
Why are you so stupid? Rhetorical question. Don't answer.
For those who argue that democratic government is the wisest custodian, e.g. there is estate taxation and government redistribution and investment.
I urge you to watch this video, your comment compelled me to find it:
http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocra...
Capitalism made Justin Bieber rich. This makes him a wise custodian of wealth. Not only is my previous statement wrong, but so is yours.
With regard to Mr. Bieber, or celebrities/sports stars in general - there are many foolish ways for them to lose their wealth and only a degree of frugality, i.e. living within their means, will preserve it.
The loaded term "wise custodians" as if rich people are benevolent caretakers of the world's wealth due to their infinite wisdom is what I'm attacking here. It just simply isn't true. Justin Bieber is full proof of that. The guy is not wise, he's not a benevolent custodian either.
Wealth is not magically redirected towards smart caring people. You are not a "wise custodian" because you are rich. You will always have stupid people who are rich and smart people who are not rich.
Like him or not, Justin Bieber has proved valuable to quite a large sub set of the population.
Justin Bieber is not a wise custodian of wealth. Wealth is not magically redirected away from stupid people towards smart people is all I'm saying. Many smart people are not rich, just like how many people who are rich are also stupid.
The loaded term "wise custodians" as if rich people are benevolent caretakers of the world's wealth due to their infinite wisdom is what I'm attacking here.
I would say, if placed under equal circumstances, the intelligence and benevolence of rich people is more or less the same as all people in general. We should be in agreement on that.
They do not. A person of great wealth can purchase a good or service from a person of less relative value.
Otherwise, I don't understand what you're saying?
Even in simple terms, it's likely that a person of lesser value than you made your underwear, but you still need that person so that you can make all the the money you do being more valuable to the world than them.
Or from another perspective, all wealth is relative, which means you cannot have great wealth without great poverty.
Isn't 'redeploying money back to economy' basically investing?
I think what you first would want is an increase to minimum pay if you want to increase the flow of money in the areas where I think you want.
Unless the stock is an IPO, you are essentially trading paper when you buy a stock. No GDP is generated on that transaction. In a sense you could be redeploying if the seller of the stock takes the money from the trade and redeploys it in a meaningful way.
I agree that rich people paying their workers more money is a meaningful way to redeploy their wealth.
Who would buy an IPO if they knew everyone else took your advice and would never let the IPO buyer exit? Trading stock is dealing in liquidity. Liquidity is where all the wealth in the market is made available to humans.
The most natural/good way of doing this is running a legitimate working business and paying workers with revenue money generated by the business itself. Other ways include borrowing money, getting money from angels/venture capitalists, or money from an IPO or reissuing of shares.
>Who would buy an IPO if they knew everyone else took your advice and would never let the IPO buyer exit? Trading stock is dealing in liquidity. Liquidity is where all the wealth in the market is made available to humans.
There are many IPOs that don't let the buyer officially exit yet people still buy it: Google, facebook, microsoft. In fact almost all IPOs are like this. When you buy stock from these companies you can't officially redeem your shares for the value it's worth. You can only sell it to another person.
Believe it or not the stock market is a market of people trying to outthink each other in buying paper for a low price and selling it for a higher price. No GDP is generated in these exchanges. Magically, the prices for these pieces of paper follows the intrinsic value of the company they "represent." People simply being told that the paper represents a percentage of the company is enough to make people behave as if it actually does even though the owner of the "paper" can't use the paper to redeem a portion of the corporate value.
You can only do one thing of monetary value once you own a stock share: Sell it to the next idiot. It's funny how it all works out. You could say that the entire stock market is a bubble of empty dreams.
The only time you can officially redeem a stock share is when a company liquidates. But that almost never happens, and people buy stocks expecting it not to happen.
Dividens explicitly give the owners of stock a slice of yearly profits.
Over long periods of time, however, dividends, when reinvested, do have a great effect.
http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocra...
This person elucidates my views completely and in a way that may be easier to understand.