In fact, data from the Federal Reserve shows that wealthy people actually end up borrowing a lot more money than the country's lowest earners. And the top 1% of the population actually holds a whopping 4.6% of all debt, while the bottom 50% of the country only has 36% of outstanding debt.
Leverage is using borrowed money to increase your return on investment. Leverage can allow you to achieve returns that you thought were impossible but at a greater risk of losing your capital. Here are five ways that debt through the use of leverage can make you richer.
Is being debt-free the new rich? Yes, as long as you have money and assets, in addition to no debts. Living loan-free is a fantastic way to stay financially secure, and it is possible for anyone. While there are a couple of downsides to being debt-free, they are minimal.
According to a 2020 Experian study, the average American carries $92,727 in consumer debt. Consumer debt includes a variety of personal credit accounts, such as credit cards, auto loans, mortgages, personal loans, and student loans.
Kevin O'Leary, an investor on “Shark Tank” and personal finance author, said in 2018 that the ideal age to be debt-free is 45. It's at this age, said O'Leary, that you enter the last half of your career and should therefore ramp up your retirement savings in order to ensure a comfortable life in your elderly years.
The advisor says the wealthy frequently do exactly that using a financial tool known as a securities backed line of credit, or SBLOC. This is a lending product that allows someone to access some portion of the cash value (usually 50-100%) of their investments by using them as a form of collateral on the loan.
Billionaires multiply their wealth by borrowing against their assets to pay for new investments. But they aren't the only ones who can use leverage to their benefit.
Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. They establish an emergency account before ever starting to invest. Millionaires bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth.
Millionaires use credit cards like the Centurion® Card from American Express, the J.P. Morgan Reserve Credit Card, and The Platinum Card® from American Express. These high-end credit cards are available only to people who receive an invitation to apply, which millionaires have the best chance of getting.
Bank of America, Citibank, Union Bank, and HSBC, among others, have created accounts that come with special perquisites for the ultra-rich, such as personal bankers, waived fees, and the option of placing trades. The ultra rich are considered to be those with more than $30 million in assets.
But for rich people with millions of dollars in the bank, covering the costs of a property out of pocket would likely be within reach. Despite the fact that many wealthy people could afford to buy a home outright, they often get mortgage loans anyway.
Bankruptcy is an option for the wealthy because they have the money to pay for filing and to work with experts who are able to help them create better financial arrangements.
Further, a second study by Fidelity Investments found that 88% of all millionaires are self-made, meaning they did not inherit their wealth. The Fidelity study also revealed that self-made millionaires' top sources of assets were investments/capital appreciation, compensation and employee stock options/profit sharing.
The average billionaire only holds 1% of their net worth in liquid assets like cash because the vast majority of their fortunes are usually tied up in business interests, stocks, bonds, mutual funds and other financial assets.
Investing Only in Intangible Assets
Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.
When the world's richest man wants cash, he can simply borrow money by putting up—or pledging—some of his Tesla shares as collateral for lines of credit, instead of selling shares and paying capital gains taxes. These pledged shares serve as an evergreen credit facility, giving Musk access to cash when he needs it.
According to an article by Insider, billionaires can typically afford to spend $80 million a year, with many spending their wealth on private jets, real estate, remote islands, cars, art, trips to space, and superyachts. All these industries are booming as the world's billionaires seek lavish goods and investments.
It can be difficult to get out of debt quickly. The average person should be debt free by the age of 58, unless you choose to extend your payments. Otherwise, you could potentially be making payments for another two decades before you become debt free.
25—34 year olds = $78,396
Credit cards often have high interest rates that can cause debt to snowball. Younger millennials carry an average debt of $78,396, primarily due to credit card balances, according to Experian.
Here's the average debt balances by age group: Gen Z (ages 18 to 23): $9,593. Millennials (ages 24 to 39): $78,396. Gen X (ages 40 to 55): $135,841.