5 Ways Rich People Make Money With Debt

I’m pretty sure you’ve heard the phrase “Debt is the root of all evil”. 

Never get into debt, debt is slavery. 

Now this might be true to a certain extent. Because if you are drowning in debt, your life is practically over. 

While you are working hard to pay back your debt, your debts are not waiting for you, they are growing every day, and since no one lends out money for free, an interest is always charged. 

Despite all of this, the United States has embraced debt, the total US consumer debt is a whooping 17 trillion dollars, with credit card debt exceeding 1 trillion dollars, which means everyone is racking up their credit card bills. 

But not all is bad, as debt is not always considered a bad thing. 

Now, while this is an unpopular opinion, as most of the debt here would be considered bad debt, stuff like credit card, car loan, and student loan. 

Which really makes you wonder, how many decades will it take to pay off these debts. 

And how on earth can debt be something that is good? 

To understand this, let’s look at how people with deep pockets use debt to make more money. 

This might be confusing as to why would the rich use debt in the first place, as they already have a lot of money in their disposal right? 

Isn’t debt supposed to be used by poor people who have insufficient money? 

But that’s not how capitalism works.

Method #1

Method number 1, most trades are based on debt. 

It might sound controversial as borrowing money to start a business is usually a horrible idea. And personally I would never recommend it. 

But there are businesses, especially traditional ones where using debt is the best option. 

Let’s say you want to sell notebooks, a common product which usually has demand for it. 

Ideally, you would fly to China, find a factory that produces the notebooks you want with good quality and for the right price. 

You would purchase a container of notebooks, ship it back to your home country and sell it to local customers. 

But today that is mostly done online via websites like Alibaba and Amazon, unless it’s a more complicated product where you would need to source it from the factory. 

Here’s the catch, you won’t have to pay for the goods upfront to have the goods in your possession. 

In the past few decades, China has become the factory of the world producing literally everything, hundreds and thousands of factories were set up to produce anything the world needs. 

In order to make it easy to sell, most factories would gladly loan you their products, in return you would be paying them back in the future. 

Of course not anyone will be able to borrow from them, you would need to form some sort of trust relationship with them beforehand. 

But that is how businesses have been running for the past 50 years. 

Once a product has been sold in the US, or any other country, you would pay the factory and borrow more product from them. 

You are basically saying to the factory, you know how to produce it, I know how to sell it, so let’s make a deal. 

If I sell for anything above this price, that will be my profit margin, the benefit to this is you are not tying up your own money in the transaction, which is why selling is one of the top skills you can master.

Method #2

The 2nd method is Forex, which is a market where different currencies are traded. 

This makes international trade possible. 

For instance, you cannot spend US dollars in China, you would need to use Chinese Yuan (RMB) to pay your employees in China. 

There is a market for anyone or any entity to come in to purchase foreign currencies, and based on different factors, these currencies fluctuate. 

For example, the Fed raises interest rates which will limit the supply of US dollars in the market which makes it stronger against other currencies. 

So if you can predict which currencies will rise or fall, you can make a lot of money in the forex market. 

But what makes this market different from the rest is for every dollar you use to trade in forex, you can borrow an additional 100 dollars, that means if you trade using 1000 dollars, you would be able to hold a position worth 100,000 dollars, and if you make a small profit of 1%, it would be huge in terms of the impact due to the leverage.

Method #3

Method number 3 is refinancing. 

Real estate debt is the best kind of debt as it’s filled with loopholes. 

If you don’t have a mortgage then you are paying extra taxes, rich people always have multiple mortgages to be able to get all of those deductions. 

Remember, every dollar that is supposed to be paid for taxes, but instead saved is a dollar earned. 

And that’s how rich people get richer. 

But let me walk you through a more actionable way. Let’s say you have 200,000 dollars, that’s a lot of money. But it can be little as well depending on who you ask, as that might not even be enough to buy a house. 

Of course, you can potentially get a mortgage of 800,000 dollars as you use the money you saved as down payment. 

But here’s the secret, let’s say you found a property for half a million dollars, it’s in a bad condition and it needs a lot of renovations. 

You head to a bank and get a mortgage by making a 20% down payment, now let’s say you are going to spend around 10% of the total cost to renovate the house. 

You would need 50,000 dollars. 

You head back to the bank, but this time, you go to refinance the mortgage, now remember in your first mortgage, the value of your property was only 500,000 dollars as it was in such bad condition. 

But now after your renovation, more people are willing to rent the place, and hence the market value of the property has risen, let’s assume to 700,000 dollars. 

The first time you are going to get an 80% mortgage, and 80% of 700,000 dollars would be 560,000 dollars. 

Now, 400,000 dollars out of that money is going to go to the first bank that gave you that first mortgage, and don’t forget the 50k that you used for renovations, and you would be left with 110,000 dollars, which is extra profit. 

You made 110,000 dollars of profit using debt, and you are left to use that property that you can rent out to build equity and generate passive income. 

On top of that, you are going to avoid paying high taxes because you have a mortgage. 

Considering this, do you still think that all debts are bad? Let me know what you think!

Method #4

The fourth method is via credit score. 

As you see, debt is a powerful tool. 

Every successful company or entrepreneur uses debt in various ways, especially if you have a proven business model, borrowing money to finance business operations is practiced by pretty much every business. 

So stop thinking that all debt is bad. 

Of course, debt with high interest rates like credit cards are horrible. 

But in order to minimize the interest rate, you need to reduce the risk of owing you money. 

How would you do that? 

You need to build a track record of being a reliable borrower. 

There are billions or trillions of dollars in the bank waiting for someone to borrow. 

And even if there isn’t any money in the bank’s vault, banks can create money out of thin air.

Method #5

Method number 5 is hedge funds. 

Hedge funds are made by the rich for the rich to make rich people richer. 

They usually have unpopular strategies. 

Mortal people like me, we make our best effort to identify which companies are going to grow and thrive, and then we invest the money we worked so hard to earn in hopes that these companies will grow. 

But hedge funds usually use an opposite strategy, they try to make money when companies fall or go bankrupt, such as GameStop. 

But in that case, the internet challenged them and made them lose nearly 13 billion dollars. 

But how do hedge funds make money with debt? 

Let’s say you expect Meta, the company behind Facebook and Instagram to drop in share price. 

And that’s because Apple, who produces the most popular smartphone in the world, will no longer allow those apps to continue tracking your online activity, strengthening your privacy. 

You know this will damage Meta’s business model, so you call your broker to borrow a single share of Meta stock, which costs 285 dollars, and instantly sell it in the open market for 285 dollars. 

So now you have 285 dollars in your pocket. 

But remember you still owe your broker 1 share of Meta stock. 

Let’s say you made the correct deduction and the next week Meta stock dropped to 200 dollars a share. 

So now you use the money to buy back a Meta stock and return it back to your broker. 

Congratulations, you have profited from the difference, which is 85 dollars. 

Now this is not including any fees, while it sounds simple in theory, it is extremely risky in practice. 

What if the price doubles overnight, and you still owe your broker a share, plus any interest that the broker charges you for borrowing a stock. 

You would then have to fork out 570 dollars to buy a share and return it back to your broker plus the interest charged. 

When you buy a stock and try to sell it at a higher price, your maximum loss is only the amount you put in. 

But that’s not the case for shorting, if the price keeps on rising, your losses will also keep on increasing. 

In theory, your losses would be unlimited. 

But if you have a hundred analysts working for you, you can make a fortune using this strategy.

So that's the 5 methods the rich use debt to make more money for them, what do you think?

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- Ivan