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Debt is generally considered to be bad by most. The thought process is that the more debt you have, the more difficult it becomes to afford necessities, invest in your future, and so on.
But while taking on more debt might not be the best idea for everyone, it certainly works for those who have more wealth and are looking to build it. Are you interested in learning how others leverage debt to their advantage rather than their detriment?
If so, here’s how the rich use debt to get richer.
5 Ways Rich People Use Debt
1. For Tax Loopholes
If there’s one thing the rich are famous for besides whatever got them their fortunes in the first place, it’s avoiding taxes.
Many rich people will leverage debt in order to take advantage of tax loopholes while also accessing financing that can help them tap into more opportunities.
A few examples of this include borrowing against their life insurance (tax-free unless your policy is no longer active or you borrow more than you’ve paid in premiums) or borrowing against stock portfolios.
Of course, there are other creative ways to leverage debt to take advantage of tax loopholes, such as itemized deductions on home mortgages, deducting investment interest, and beyond.
If you’re savvy, you can make money by having the tax laws work in your favor.
2. To Buy Real Estate
Real estate is a valuable investment. Whether commercial or residential, people are always going to need places to live and work.
The rich who leverage debt and credit to build wealth through real estate will normally see gains, whether it comes in the form of a sale to another buyer after the property has appreciated or passive income in the form of rent.
If you’re looking to build your wealth and achieve financial stability, real estate is a top investment opportunity worth considering. Just make sure you understand the market and best practices before you dive in.
3. To Buy Companies
Renting or selling property isn’t the only way that rich people make money. Another smart way they leverage debt is to purchase companies.
Companies are a valuable investment if they’re already demonstrating consistent profits, have valuable technologies that are in demand, could be merged with other companies, or are on their way up.
Not every company is a hit, but there are plenty of rich people who have acquired high-performing companies that continue to make them money.
4. Short Selling Stocks
Short selling is an investment strategy whereby you borrow shares and sell them on the market, believing that the prices will plummet and you can buy them back for a lower amount, realizing a profit.
Short-selling can be tricky, but when executed correctly, it can be quite lucrative.
5. Debt Recycling
Debt recycling is a strategy where you use equity from your home to invest in income-producing assets.
When your cards are played right, you can then quickly pay off your home loan, benefit from tax breaks, and jumpstart wealth building. As with some of the above strategies, it’s important to do your due diligence before getting started.
How Can Debt Be Used to Get Rich?
When you think of debt, what is the first thing that comes to mind?
If you’re like most people, you might be thinking about credit cards or car loans. These are bills you have to pay back consistently and in a timely manner. Fall behind, and you can risk losing your vehicle or damaging your credit score.
But this is just one example of debt.
Debt can also be used to help people get rich when they strategically leverage it to receive a positive ROI.
One example of this can be found with house flippers in the real estate industry. Those who purchase homes and fix them up as a career may tap into financing opportunities, like fix-and-flip loans, to fund their flipping endeavors.
Even though they’re putting themselves into debt in the short term, their initial investment will help them realize a profit down the road.
Put simply, debt doesn’t have to be something that holds you back. In many cases, debt can be used to your advantage in order to grow your wealth and help you access more opportunities.
What Is Good Debt?
As illustrated by the example above, the definition of good debt is any kind of debt that can help you generate future income and increase your net worth. The lower the interest rate, the better.
Some examples of good debt include student loans (although this depends on the type you apply for), business loans, and even home loans.
Student loans, for example, are an invaluable investment in your future career prospects. One study in the Federal Reserve Bank of New York found that the average college graduate with a bachelor’s degree earned $78,000 a year, that’s $33,000 more than high school graduates.1
The only thing to keep in mind is not all student loans are built equal. Private loans may be accompanied by much higher interest rates. You’ll also need to consider your major, job prospects, and other factors that will lead to success.
Meanwhile, home loans with low interest rates can help you build equity, establish an investment that traditionally appreciates over time, and can help you borrow against your equity in the future.
As with the above, there are several considerations you need to make in order to ensure your mortgage works for you rather than against you. This includes the interest rate, loan terms, and beyond.
The best kind of debt enables you to finance income-producting assets. This includes debt to purchase businesses and rental real estate properties.
When you’re able to leverage debt to secure a potential return in the future, it’s good debt.
Read our analysis in Good Debt vs. Bad Debt: Know The Difference
What Is Bad Debt?
Bad debt, on the other hand, is any kind of debt that doesn’t lend itself to potential returns (with some purchases even depreciating rapidly).
Bad debt often carries high interest rates or variable rates that could pose a problem.
Some examples of bad debt include credit cards and other types of high-interest loans. These types of loans are typically used for basic purchases that don’t offer any type of return.
While often necessary for many, it can be quite easy to rack up great amounts of debt given how easy it is to spend money on day-to-day products. Once you’ve accumulated more than you’re able to pay off, you’re going to get hit with higher rates, penalties, and fees.
It’ll also make it much harder to recover as your debt grows and your credit score drops. This is why this form of debt is considered to be more of a hazard rather than an asset, especially when you consider that the average credit card debt is $7,279 in 2022.2
That being said, it’s all up to you how you manage your debt. If you keep credit utilization low, apply with full awareness of the terms, and make payments on time and in full, you shouldn’t be hurt too much by bad debt.
You can start getting back on your feet financially by using tools like a net worth tracker or personal balance sheet, creating a plan to pay off debt fast, and establishing systems to help you avoid racking up debt in the future.
Debt isn’t always a bad thing. In fact, you can make your debt work for you rather than allowing it to become a major source of stress in your life.
Use the guide above on how the rich use debt to get richer to learn more about debt and how you can leverage it to your advantage.
Dylan Buckley is a freelance finance writer and editor with 7 years of professional experience. Specializing in personal finance, cryptocurrency investments, and Fintech, Dylan is deeply passionate about creating content that helps readers make informed, confident financial decisions. He studied finance in college and maintains a credit score over 780.