Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Paper Millionaire

What it is:

A paper millionaire is a person who has at least $1 million of unrealized gains.

How it works (Example):

Let's say John Doe starts a business. He invests all of his $50,000 savings, and soon the business takes off. Four years later, John wants to get a bank loan to expand the business. The bank deploys its financial analysts to conduct a valuation of the business. Due to the high sales growth and the business's profitability, the bank values John's business at $1.5 million.

Nobody writes John a check for $1.5 million. He simply has an asset that has become worth $1.5 million. He has become a paper millionaire.

Why it Matters:

Being a paper millionaire is very exciting and fun to talk about, but it doesn't always mean the paper millionaire has the cash to buy groceries, pay college tuition or pay the gas bill. Only after the person sells the asset does he or she truly capture the value of the asset -- and become a "real" millionaire.

Company founders often become paper millionaires when their companies go public. They often own a lot of shares in the company (if not all the shares), and the stock market determines the value of those shares. This can mean that an ownership position can suddenly become worth millions overnight. However, we all know that you can't buy groceries with shares of stock. Until they sell their shares, they're merely paper millionaires.