SECRET Ways The Rich use to Turn DEBT Into WEALTH
Is debt evil? You might think so. In fact, it is generally a common belief that debt is one of the worst things in life. And the feeling that being in debt is like having a huge weight on your shoulders is a commonly held belief. But is that true? If you have too much debt is your life really over? Amazingly, if you ask most rich people about their views on debt it is the exact opposite.
They view debt as a positive. They feel that debt, when used the right way, can actually build and develop your financial abundance. So, what is it about how the rich view debt differently that allows them to feel this way?
And how can you make it work for you so that debt is no longer a burden, but a bonus? Well, I’m Kim, and in this Article we’re going to explore some of the secret ways that the rich are able to turn debt into wealth. Are you ready? Let’s go!
Related to Borrowing
The first thing that rich people do is related to borrowing. In fact, most business transactions are done utilizing debt. That might seem confusing since borrowing money to start a business is generally a bad idea.
But using debt can often be the best choice for some companies – especially traditional ones. Let’s say you’re trying to sell ballpoint pens – an every day product that lots of people want to buy. In an ideal world, you would find a factory that makes that kind of pen at a good price.
You’d buy a container full of pens and send them to your distribution center, then sell them to your clients. However, in this set of transactions the money you make actually comes at the end of the process.
How do you pay for the factory to make the pens in the first place? Well, this is how business has been done for a long time. The business borrows money for the manufacturing with a plan to pay it back – or they leverage something they own to secure a loan for the manufacturing of the products.
Or, sometimes if the factory and business have a good relationship based on past transactions, the factory may provide products with just a down payment, essentially providing a “loan” on the total amount for when the sale of the products is made. In this situation, the rich know that borrowing is a way to create greater revenue, and they are able to secure debt with this in mind.
Related to refinancing
The second thing that the rich do is related to refinancing. The best kind of debt is real estate debt because there are numerous ways to avoid repaying it. If you don’t have a mortgage, you have to pay more taxes.
Rich people almost always have more than one mortgage so they can get all of these tax breaks. Remember that every dollar you pay in taxes is an extra dollar you’ve made. So that’s another way rich people get even richer.
Let me give you an example. In real estate, this is the primary way that rich people get rich. Let’s say you saved $200,000. If you’re making a 20% down payment you can get a mortgage for up to $800,000. Here’s the secret, though.
Let’s say you find a house that costs $500,000 and you want to buy it. It’s in bad shape and needs some or a lot of work done to it. You go to a bank and pay a 20% down payment to get a mortgage. Let’s say you’re going to spend about $50,000 to fix up the house, which is about 10% of how much the whole thing cost.
This time, in order to refinance your mortgage, you had to switch banks. The estate was in such poor condition when you took out your first mortgage that it was only worth $500,000. But now that you have fixed it up, people want to rent it from you.
Consequently, let’s assume that the property’s market value increases to $700,00, just like it did the first time. Suppose you are planning to obtain an 80 percent mortgage. However, 80% of $700,000 is $560,000, so you’ll only be able to borrow $560,000.
The first bank that gave you a mortgage will get $400,000 of that money, and if you subtract the $50,000 you spent on renovations, you’ll be left with an extra profit of $110,000. You borrowed $110,000 to get there, and now that you have a house you can rent out to generate passive income and equity. Additionally, you won’t owe taxes because you have a mortgage. A lot of real estate investors act in this way.
With hedge funds
The third way the rich use debt is with hedge funds. Hedge funds are made by rich people FOR rich people so that rich people can get even richer. And they often use strategies that aren’t popular. We are both made of flesh and blood.
We try our best to guess which companies will grow and increase in value, and we invest the money we work hard to earn in the hopes that these companies will grow. But hedge funds often use a strategy that is the exact opposite.
They try to make money when companies fail or go bankrupt. This is what happened with GameStop a little while back. But in this case people got upset and inflated the price and caused the hedge funds to lose more than $13 billion.
How do hedge funds earn money, though? With debt? Let’s say you think a certain stock, like Facebook’s, will go down because you know that Apple, which makes the most popular smartphone, will say next week that apps like Facebook and Instagram will no longer be able to track you.
They will keep track of what you do online and put privacy first, which will hurt Facebook’s business model a lot. So you pick up the phone and call your broker to borrow one Facebook stock that costs, say, $100.
You immediately sell it on the open market for $100. Congrats. Even though you’ve just received $100, you still owe your broker one share of Facebook. Let’s say you’re right and the price of a Facebook stock falls to $70 next week. Since the price of a Facebook stock has gone down, use that $100 to buy one share for $70, return it to your broker, and keep the difference.
Congrats. You’ve made $30 from a stock that went down. In theory, it sounds easy, but in practice, it’s very hard and dangerous. If you’re wrong, what will happen? What happens if the price doubles in a day?
You still have to give back the one Facebook stock you borrowed from your broker and pay interest on it. To return that stock to your broker, you must now pay $200. The most you can lose when you invest in a stock and attempt to sell it at a higher price is the amount you invested.
Not the case with the short chain. If the price keeps going up, so does your loss. Theoretically, you can lose as much as you want because the stock price could go up forever. But if you have 100 analysts working for you, this strategy can make you a lot of money.
Forex or currency exchanges
The fourth use of debt is Forex – or currency exchanges. Forex is a market where people buy and sell currencies. It makes trade around the world possible. The US Dollar can be used in China. To pay your employees, for example, in China, you need to buy Chinese RMB.
Any individual or business, then, can access the market for purchasing foreign currency. These currencies change because of different things. For example, when the Fed raises interest rates, the number of dollars on the market will go down. This either strengthens the US dollar relative to other currencies or the opposite.
If you can predict which currencies will rise or fall, you can profit greatly in this market. But what makes these markets different from others is that you can borrow an extra $100 for every dollar you use to trade in forex.
You can therefore hold a position worth $100,000 if you trade with your $1,000 starting capital. Even if you only make a small profit, like 1%, it will be a lot. To wrap it all up, debt is not always bad.
Sure, high interest credit card debt is pretty awful and should definitely be avoided. But the right kind of debt can be good if you use it in the right way. Leveraging debt to generate revenue is how the rich often build their wealth.
Naturally borrowing money requires that you have a few ducks in a row, and one of the big ones is your credit score. A good credit score is the difference that can help you create that much-needed leverage to build your wealth.