Leverage for Investment: Wealthy individuals often use debt strategically to leverage their investments. By borrowing money at a lower interest rate than the return on their investments, they can amplify their potential gains.
Their wealth allows them to borrow and banks are willing to lend due to their collateral and good credit history or belief that they will repay. The debt in such cases allows them to acquire greater assets then the true net equity alone would allow. So, debt amplifies their wealth.
In summary, borrowing money can be a strategic financial decision for wealthy individuals, allowing them to maximize returns, manage liquidity, and take advantage of tax benefits while maintaining their overall wealth.
They stay away from debt.
Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary. That's why they win with money. They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give! Debt is the biggest obstacle to building wealth.
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
Others will object to taxing the wealthy unless they actually use their gains, but many of the wealthiest actually do use their gains through the borrowing loophole: They get rich, borrow against those gains, consume the borrowing, and do not pay any tax.
Alternative long-term investments: Billionaires often hold stakes in other companies or industries as part of their investment strategy. Additionally, they may invest in tangible assets such as art or collectibles that might not be easily liquidated.
Families like the Waltons, Kochs, and Mars can avoid capital gains taxes forever by holding onto assets without selling, borrowing against their assets for income, and using the stepped-up basis loophole at inheritance. That loophole allows the increased value of assets to be passed to their heirs tax-free.
Whilst they can often afford to, most wealthy people don't pay cash for properties because they can make a better investment with their money elsewhere.
Poor budget choices and failure to follow basic financial principles can send even the richest people with a high net worth into debt. Millionaires have more money than most of us can imagine. To put into perspective $1 million equates to 588 months, or 49 years, of the average rent price in America.
Debt is simply money that you bought, and the price of the money is the interest or whatever other fees you're paying to buy the money. That's all it is. And one of the things I say about debt is that paying off debt doesn't make you rich. Meaning that once you pay off the debt, you don't start making money from it.
Because private debt aims to deliver reliable income and reduced capital volatility throughout the economic cycle, it can be an asset to your portfolio when other markets are volatile.
Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.
Former Société Générale rogue trader Jérôme Kerviel owes the bank $6.3 billion. Here's what his case tells us about financial reform.
401(k) loans
With a 401(k) loan, you borrow money from your retirement savings account. Depending on what your employer's plan allows, you could take out as much as 50% of your vested account balance or $50,000, whichever is less.
Most of the government's federal income tax revenue comes from the nation's top income earners. In 2021, the top 5% of earners — people with incomes $252,840 and above — collectively paid over $1.4 trillion in income taxes, or about 66% of the national total.
In fact, many wealthy people can and do "live off the interest." That is, they put a chunk of their fortune in a relatively safe collection of income-generating assets and live off of that—allowing them to be more adventurous with the rest.
Can you have a million dollars in a checking account? No rule says you can't have a million dollars in a checking account, but FDIC insurance typically only covers up to $250,000. Plus, you can get a bigger return on your investment by keeping $1 million elsewhere.
This is what the memes get exactly wrong: billionaires don't become and stay rich by hoarding; that's the last thing they want to do with their money. There are related myths and assumptions, such as that the only way to accumulate a net worth of so much money is through evil, if not outright unethical, means.
According to Entrepreneur, not having a budget is a common way that millionaires end up broke. These soon-not-to-be millionaires don't go over their bank statements or monthly bills to make sure that there aren't any unauthorized transactions or that they weren't overcharged.
While Bezos, for example, on any given day may qualify as the wealthiest individual on earth, he is probably not even in the top 10,000, or way more, individuals for the highest income, as far as taxable income goes. Almost all of the Bezos wealth is from unrealized capital gains, which are, so far, not taxable.
They focus on income generation
The richest people don't only invest for growth, but they also invest to generate more income. They diversify their investments and find new streams of income. They know how to turn their assets into income-generating machines, therefore achieving wealth, even if the economy takes a dip.