Have you heard something like “debt is the root of all evils.. never get into debt… debt is slavery” and that is true to a certain extent because when you’re drowning in debt, your life is over. While you’re trying to pay your debts, your debts are not waiting for you, they’re growing each day. Since no one lends money for free, there’s always an interest.
Despite all of this, the United States of America has embraced debt. The total of the US consumer debt is $14.9 TRLN. This brings the average household debt to over $5315, the US GDP is a little over $21 TRLN. which means the entire economy consist of debt.
Here’s the good news, debt isn’t always bad. Yeah, we get it, that is an unpopular opinion because most of the debt we have is bad debt. You probably have some credit card debt, car loan, or maybe a student debt and you’re thinking “it’ll take me decades to pay off all of these debts”.
How on earth can debt be something good?
To understand how debt can be something positive, let’s take a look at how people with Big pockets use debt to make even more money.
This might sound a little bit confusing because, why would anyone with a lot of money use debts in the first place, debt is supposed to be used by people who do not have money? That’s not how capitalism works. Debt is a very powerful tool if you know how to use it. That’s why we’re excited to share with you how rich people use debt to make even more money and how you can too.
1. Most of the Trades is Based on Debt
This might sound a bit controversial because borrowing money to start a business is a horrible idea, but there are businesses especially traditional businesses where using debt is your best option. For example, say, you want to sell pens, it’s a very common product and there’s pretty much demand for it. Ideally, you’ll fly to China, find a factory that produces that kind of pen with good quality and the right price.
You would purchase a container of pens, ship them to the US and distribute them to your clients. But today that’s mostly done online through websites like Alibaba unless it’s a more complicated product where you have to fly to that factory.
But here’s the catch.
You don’t have to pay for the product to have the product first. let’s explain how. In the past 50 years, China has become the factory of the world producing almost everything. Thousands of factories are producing everything that the world needs, and to make it easier to sell, most of these factories would gladly loan you their products in return that you’ll pay them some time in the future.
Really? am off to China.
Of course, they will not lend to strangers, you’ll have to build some kind of trust with them first. That’s how businesses have been running for the past 50 years. Once the client sells the products in the US or any other part of the world, they’ll pay the factory and borrow more products.
They’re telling the factory “you know how to produce it, let me help you sell it. If I can sell it for anything above this price, that’s gonna be my profit.”
What makes this strategy great is that you’re not tying down your own money in the transaction. That’s why selling is the greatest skill you can master.
Real estate debt is the best form of debt because it’s filled with loopholes. If you don’t have a mortgage, then you’re paying extra taxes.
Rich people always have multiple mortgages to be able to get all of those tax deductions. Remember, every dollar that you suppose to pay in taxes is instead saved as an extra dollar earned. This is one of the ways the rich keep getting richer.
But, here’s a more practical way.
This is how rich people get richer in real estate.
Let’s say you saved $200,000 that’s a lot of money but, if we’re going, to be honest, that,s peanuts, you can’t even buy a house. Of course, you can get a mortgage up to $800,000 since you have to make a 20% down payment.
Here’s the secrete. Let’s say you find a property that costs $500,000 and it’s in a bad condition and needs some renovation, you head to a bank and get a mortgage loan by making a 20% down payment. Let’s say you’re going to spend 10% of the total cost of the house to renovate it, you head to the bank again but, this time to refinance your mortgage.
When you got your first mortgage, the value of that property was just about $500,000 because it was in such a bad condition that no one wanted to live there but, since you’ve renovated it, now, some people are interested in renting it.
The market value of that property, let’s say rises to $700,000 like the first time, let’s say you’re going to get an 80% mortgage, but 80% out of $700,000 is $560,000. $400,000 out of that money is going to the first bank that gave you the first mortgage loan and let’s deduct the $50,000 that you spent on renovation and you’re going to be left with an extra profit of $110,000
Chin chin profit.
That’s about a $110,000 profit using debt, but that’s not all. You’re now left with a property that you can rent out to build equity and generate passive income. On top of that, you’re going to avoid paying taxes because you have a mortgage. This is a very common practice among rich real estate investors.
Debt’s not bad after all.
3. Hedge Funds
Hedge funds are made by the rich, for the rich, to make the rich richer. They usually use unpopular strategies. Most of the people make their best efforts to predict which are going to grow and rise in value and invest the money they worked so hard to earn, in hopes that the companies will grow.
But, hedge funds offer a completely new strategy. They try to make money when companies grow or go bankrupt as it was with the case of Game Stop, although in that case, the internet challenged hedge funds and pushed them to lose over $13 BLN.
So how do hedge funds make money with debt?
Let’s say you expect a certain stock to decline, for example, Facebook because you knew that Apple who produces the most popular smartphones will announce next week that they’ll no longer let Apps track you like Facebook or Instagram tracks your online activity and make privacy their priority. That will greatly damage Facebook’s business model.
You pick up your phone and call your broker to borrow from them a single Facebook stock that costs let’s say $100 and instantly sell it in the open market for $100. Congrats, you have $100 in your pocket but, you still owe your broker one Facebook stock.
Let’s say you’re right and next week Facebook’s price drops to $70 you use that $100 to buy one Facebook stock at $70 since the price dropped and return it to your broker and pocket the difference. That’s a $30 profit. It sounds simple in theory but it’s extremely difficult and risky in practice.
What happens if you’re wrong? what if doubles overnight? you still have to return that single Facebook stock to your broker and pay interest for borrowing that stock. Now you have to buy that stock back for $200 to return it to your broker.
When you buy a stock and try to sell it when it rises, the maximum you can lose is the amount you invested in but, not in the case of shorting, if the price keeps rising, losses keep rising. Theoretically, you can make unlimited losses as long as the stock price keeps rising.
If you have an analyst working for you, you can make a fortune using this strategy.
Forex is a market where currencies are traded, it makes international trade possible. You can’t possibly use a USD in china, you have to buy China’s YEN to pay your employees for example.
There’s a market where any individuals or companies could come in and trade foreign currency. And based on different factors, these currencies fluctuate, for example, say the FED raises interest rates that’ll limit the supply of dollars in the market and make USD stronger against other currencies.
If you can predict which currencies will rise or fall, you can make a lot of money in this market but, what makes this market so different from the rest is that, for every dollar you use to trade in forex, you can borrow an additional $100 that means if you trade using $1000 you can hold a position worth $100,000 and if you end up making a small profit like 1%, it’ll be huge compared to your initial investment.
5. Credit Score
As you’ve seen, debt is a powerful tool. Every successful business, company, or entrepreneur uses debt in various ways, especially if you have a proven business model. Borrowing money to finance purchase orders is practiced pretty much by every business. So stop thinking that all debt is bad.
Of course, debts with a high-interest rate suggest credit cards are horrible but, to lower interest rates, you have to minimize the risk of loaning your money.
How do you do that?
Build a track record of being a reliable borrower. There are billions if not trillions in the banks waiting for someone to borrow them, and even if there isn’t any money, banks can create money out of thin air.
So after all Debt ain’t as bad as it’s been portrayed. Utilizing the power of debt can give you an edge in the financial world.
What’s your say on the issue of debt, is it bad or is it good? We’ll be waiting for you in the comment section. Don’t forget to follow and subscribe to get the latest update.