Do Millionaires Have Debt tells you how to get out of debt with absolutely no credit repair. It will teach you how to get out of debt, regardless of your situation. Whether you are just starting out or have been in the hole for years, this will be the most important book you’ll ever read.
Do millionaires have debt? While everyone has different budgets, needs, and wants out of life, the truth is that you should strive to eliminate as much debt as possible from your budget.
If you have a lot of money, you probably don’t need credit for anything since you could pay cash for houses, cars, and other purchases. But rich people do borrow frequently, taking out loans such as mortgages and using credit cards.
The difference is, most wealthy people follow a few simple rules when borrowing to help them ensure their loans improve their financial position — rather than leaving them worse off while enriching their creditors.
The good news is that anyone can follow these rules — even if they aren’t rich. Here are three guidelines you should consider adopting as your own.
Avoid borrowing for consumption
Generally, rich people don’t borrow to buy consumer goods that they can’t afford. For example, they wouldn’t charge groceries on their credit card and not pay off the balance, nor would they take out loans to fund an expensive vacation or to buy fancy clothes or jewelry
Rich people do use credit cards often though, so they can earn rewards — but they pay the balance off in full so they don’t pay interest. By living on a budget and avoiding taking on debt for assets that don’t increase in value, you can also borrow like a rich person.
Use debt as leverage to grow wealth
When rich people borrow, they do so because they want to improve their overall financial situation, and they can do that by leveraging the money lenders provide. You can do the same.
For example, a wealthy person might take out a loan to buy an investment property that produces consistent income and goes up in price. This can increase their net worth as the value of their asset grows. Or they might use a margin loan to invest more money in the stock market so they can try to earn a higher return.
Wealthy people may also decide to borrow because it lets them make better use of their resources. For example, it’s common for rich people to take out mortgages. That’s because interest rates are low and interest is tax deductible. Rather than tying up their cash in a house, they can get a low-interest loan and invest their own dollars in assets that produce a better return.
Steer clear of predatory lenders
Finally, rich people avoid high-interest loans with predatory terms such as extreme fees and very short repayment timelines. This includes car title loans and payday loans.
That said, it’s easier to avoid this type of borrowing when you are wealthy and have good credit — and when lenders compete for your business. But it’s a good idea to try to minimize this type of debt even if you’re struggling financially. If you don’t have perfect credit, for example, consider a government-backed mortgage instead of a subprime home loan and look into a payday loan alternative from a credit union rather than a payday or car title loan.
It’s definitely harder for the average person to follow these rules — but if you can swing it, you might increase the chances of making a little more money of your own. Then you can make lenders work for your business — and have the confidence of knowing you won’t have to borrow unless you’re doing so for a strategic reason to improve your financial situation.
Efficient’ debt verses ‘inefficient’ debt
It’s important to outline the difference between efficient and inefficient debt.
Inefficient debt is generally associated with assets that depreciate in value and have no potential of producing income or offering tax benefits. This could include debt such as a car loan or using a credit card to pay for a holiday.
Efficient debt on the other hand is acquired to purchase assets that have the potential to grow in value and/or generate income that can be used to pay back the debt. Examples of such assets include property, shares and other securities such as managed funds. It’s this type of debt that can help you build real wealth over the long term.
There are a number of ways to manage debt as a means to build wealth over the long-term.
1. Remove inefficient debt
Having inefficient debt is more than likely reducing your wealth due to the associated interest and fees. In some cases, it may be worthwhile focusing on paying down this debt first – starting with your highest interest/fee debt, and progressively paying this off.
For instance, if the interest on your credit card balance or personal loan is more than the interest on your home loan, depending on your circumstances, it may be better to pay off your credit card debt first given it has higher interest and fees than your home loan. By utilising this approach, you should be able to progressively reduce your overall interest payments.
2. Borrowing to invest
Borrowing to invest (e.g., in property or shares), or gearing, can be a powerful means to build wealth over time as it enables you to purchase more investments than would be otherwise possible.
If your investments increase in value over time, gearing can generate a higher overall return, after the interest and other costs associated with the debt have been factored in. Capital growth and income generated from the assets can also be used to pay back the debt plus interest and fees. The interest charged on the debt may also be tax deductable.
However, there is always a risk that your investments may decrease in value, resulting in owing more on the loan than the value of your investment. If you’re unable to pay back the loan due to unexpected circumstances such as, an interest rate increases or you’re out of work for an extended period, the lender may have the right to take ownership of your investments.
In a worst-case scenario, depending on the amount you’ve borrowed to invest, you could lose more than your initial capital.
Varying examples of how gearing may work, can be viewed from this article.
3. Debt Recycling
Debt recycling can be an effective strategy to accumulate wealth over time by converting some of your debt, which is inefficient (doesn’t generate capital growth or income, or isn’t tax-deductable) into debt that may be efficient (generates capital growth or income, or is tax-deductable).
One way to do this involves using a lump sum – possibly received from a bonus or an inheritance – to pay off your inefficient debt. If you then borrow the same amount and invest it, you’re essentially replacing the inefficient debt with a debt that is tax-deductable and could potentially generate wealth.
There are other options for implementing a debt recycling strategy, with varying levels of risk. A financial adviser may be able to help you determine a strategy that is most suitable for your needs.
The risks associated with taking on debt
Using debt as part of your investment strategy can introduce substantial risk including:
- Borrowing could increase potential losses
- Your losses could exceed the amount initially invested
- The value of your investments purchased using debt may not increase, or if the value does increase, it may not be sufficient to cover the costs of the loan such as interest and fees
- You may need to sell your investments sooner than intended to cover your interest, fees and charges
- If you are unable to repay your loan, the lender may have the right to sell your assets to cover outstanding repayments, interest or fees
- You may be liable to pay more tax.
Simple Habits of the Average Millionaire
They’re avid readers.
President Harry Truman once said, “Not all readers are leaders, but all leaders are readers.” One of the reasons millionaires become millionaires is because of their constant desire to learn. To them, leadership books and biographies are much more important than the latest reality show or who got kicked off the island. When they have free time, they use it wisely—by reading.
They stay away from debt.
One of the biggest myths out there is that average millionaires see “debt as a tool.” Not true. If they want something they can’t afford, they save and pay cash for it later.
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. We tell that to everyone. You need to avoid it like the plague. Your dreams are too important!
They give.
Sure, some rich people can be selfish jerks—just like anyone else. But the millionaires who live down the street, the ones you don’t even realize are wealthy, are some of the most giving people you’ll ever meet. We know because we’ve met a lot of them. They work hard, save and respect the ability of others to do the same.
Whether it’s tithing at church, donating to a charity or just giving to friends and family, these people have generous spirits. They realize that the most important thing you can do with wealth is help others.
That’s actually why they continue building their wealth. They realize they can’t take it with them when they die. Instead of spending it all on the latest toys, they choose to leave a legacy for the people who mean the most to them.
Conclusion
Millionaires have debt. It is a fact. Yes, you heard it right! Millionaires do have debt, and it’s one of the most common questions about wealth: isn’t debt bad? Don’t millionaires avoid paying interest and save every dollar they can in order to become wealthy? This is not exactly true.