Do you know why the rich get richer? This is simply because they’ve mastered the ways to make money with debt. Although there is good debt and bad debt. Good debt is what the rich people use to make money and they to stay clear of bad debt.
You can use good debt to start leveraging the power of your money and to create passive income streams that help you develop real wealth. Without debt, very few people would own a house or be able to use their high earnings to start building their ‘empire.’
The major concept of using debt to invest positively is the use of leverage to exponentially multiply your returns. By the way, Leverage means using borrowed money to increase your return on investment. Leverage can allow you to achieve returns that might seem impossible but at a greater risk of losing your capital.
Do you want to know the ways rich people make money with debt? Let’s dive right in.
9 Ways Rich People Make Money With Debt
1. Use debt to start or buy a business
Do you have a great business idea that needs funding? Or, you saw a franchise in a great location that you want to purchase? Although some businesses just require a little amount of money to start.
Banks, financial institutions such as Wells Fargo Bank, and government organizations such as the Small Business Administration (SBA) and Small Business Lending Fund (SBLF) offer loans to people wanting to start, buy or grow a business. Although if you are applying for these loans, it takes time and requires some qualification process, but do your homework and draw up a solid business plan, and you can qualify for a loan at a very low rate.
Set up your business with the loan, grow your business, pay off the loan, and in a few years you will not only be growing your generational wealth into a valuable legacy you can leave to future generations, but you’ll also be an inspiration to others.
And, if you employ staff, you’ll be helping others earn an income and grow their wealth, which is also great for the economy!
2. Leveraged ETFs
Leveraged exchange-traded funds (ETFs) provide rich people the opportunity to amplify their returns by going long or short on a particular index. They use Fund companies that offer leveraged ETFs that allow investors to multiply returns (and losses) between 200% and 300%.
These funds let allow rich people to invest in specific indexes, bonds, commodities, or sectors. Leveraged ETFs are attractive ways rich people make extraordinary profit potential.
The problem is that the same way that leveraged ETFs bring in huge returns on investment is the way one can lose a huge amount of money. Unless you are great at trading in and out of these funds, leveraged ETFs can magnify losses by wiping out your entire investment in a few days.
3. Invest in a Geared Managed Share Fund
A managed share fund is ‘internally geared’ so that you don’t have to take out an investment loan yourself, yet you can still benefit from the ‘gearing’ effect of borrowing to invest. In this scenario, the fund manager borrows (at wholesale rates) on behalf of investors to invest in international or local share markets.
With all of the above steps, it’s important to get quality advice and to understand the risks and the potential returns.
4. Short Selling
Short selling is a popular way the rich people also make money from debt by betting against particular security by borrowing shares from an investor and selling them in hopes that the shares decline.
Short sellers have made some people rich by properly timing declines in stock prices. The downside to short selling is that losses are unlimited, which means that short sellers can lose much more than the initial investment.
5. Forex Trading
Forex trading allows investors to control large blocks of currencies with a small amount of money. Currency investors can lever up their accounts 100:1. The pros of currency trading are that you can take a small amount of money and turn it into significant sums very quickly.
George Soros is known as the “man who broke the Bank of England” netting $1 billion by betting against the pound. Conversely, currency trading has the potential to make people rich in a matter of minutes. But don’t forget that you can some or all of your money in forex.
6. Use debt to buy real estate
One of the ways rich people make money with debt is because they understand how to use debt to finance real estate. Real estate, such as an apartment that can be rented out, can be used to generate a second income. Rich people use debt to buy some pieces of real estate which can later be sold at a higher price when the value of real estate rises or is rented out to generate monthly or yearly income.
7. Margin Investing
Investing on margin allows rich people to buy a higher dollar amount of stock than they actually have money for. For instance, if you had $50,000 in your traditional brokerage account, you could leverage your investment and open a margin account.
A margin account gives you the opportunity to put up a max of 50% of the purchase price of a stock. You would have $100,000 in cash and an additional $100,000 would be loaned to you from your broker. Your $100,000 investment gives you $200,000 worth of buying power. You could use this money and buy $200,000 worth of stock.
If the stock price appreciates, then you can pay back the loan and pocket the profit. The downside to margin investing is that if the equity in your account falls below a certain value, your brokerage firm can issue a margin call. If you can’t meet your margin call because you don’t have enough funds, your broker can liquidate your entire position in stock leaving you with losses.
Hedge funds are some of the biggest users of leveraging the rich use to make money. They are popular for generating abnormal returns by using leverage. Many hedge funds lever up to 10 times their total assets. Billionaire hedge fund managers like John Paulson have used leverage to turn accredited investors into multimillionaires.
However, if the fund manager’s investment thesis is wrong, this can drive a hedge fund out of business and lose the capital of all investors. Hedge funds such as Long-Term Capital Management (LTCM), which needed a bailout, were levered up as much as 30 times their assets.
9. Debt Recycling
Debt recycling is where, as you pay off your home loan, you redraw the equity you have built up to invest in shares or other property; again, the bad debt becomes a good debt that can earn you an income and can be used to pay back the loan, as well as providing tax breaks. Any excess income can also be fed back into your home loan to pay that off quickly and make further interest savings.
The Bottom Line
Rich peoples use debt to make money and they use debt to get significant returns. They either finance a real estate deal with debt and make a huge passive return, or they invest in hedge funds or leveraged ETFs.