5 Ways Rich People Use Credit
According to a recent survey by Bank of America's U.S. Trust, wealthy Americans aren't afraid to borrow money. In fact, half of "very wealthy" households with more than $10 million in investable assets have more than 10% of their balance sheets in borrowed money.
However, while this group seems to be very willing to take on seven-figure debt loads, there are only certain things they are willing to borrow money for. Basically, if borrowing money creates an opportunity, it then becomes worth it.
Here are the top five ways the very wealthy use credit, all of which you can learn from and apply to your financial goals.
1. Buying real estate
I'm not just talking about investment properties here. Even the richest of the rich tend to finance their primary residence. In fact, about 60% of millionaires have a mortgage on their home. Believe it or not, billionaire Facebook CEO Mark Zuckerberg actually took out a mortgage on his $6 million Palo Alto home.
I mentioned already that the wealthy are willing to borrow money if they see an opportunity. Well, you can obtain a 30-year mortgage for about 4.3% and a 15-year mortgage for about 3.4% right now.
It is fairly easy to produce safe 5-6% investment returns without taking on much risk, so you can actually profit by borrowing money to finance a home purchase and leaving your own cash invested at a higher rate of return.
2. Paying taxes
Similarly to the real estate opportunity, it is entirely possible to borrow money to pay your taxes and leave your money working for you.
You could even pull this one off for no interest whatsoever. There are tons of credit cards offering 0% "teaser" rates for time periods of up to 18 months, and a good list can be found here. So, you can basically get an interest-free loan and charge your tax tab to a credit card, taking your time to pay it off while your money makes you more money.
There are several payment processors approved by the IRS with fees ranging from 1.87-2.35% of your tax bill. At 0% interest for over a year, however, that's a small price to pay. Just make sure to pay the bill in full before the teaser rate expires.
3. Opportunistic investments
This can refer to anything from buying rental property to investing in a friend's business, but the same general rule applies. If you are 99% sure you can make more than it costs to borrow money, it might be worth it.
For example, let's say you find a duplex for sale near your neighborhood that costs $200,000 and based on a market analysis, you are certain it'll bring in $15,000 per year in profit (a 7.5% annual return) after all expenses. Even if you can afford to pay cash, it would make sense to finance the purchase if you can borrow money for substantially less than 7.5% interest, which shouldn't be too hard in the current low-rate environment.
4. Funding education
One of the expenses most wealthy people are very willing to splurge on is education. When financing educational expenses, the same philosophy applies as with all previous credit uses.
Federal student loans have interest rates of around 6.8%, but private loans can be found with much lower rates, especially with good credit. A quick search on finaid.org shows fixed-rate student loans with rates around 5.74% and variable rates as low as 2.25%.
Borrowing for education is also usually a good idea because it can produce a very nice return on investment, especially if you go to school for an in-demand career field. According to a recent Wells Fargo survey, the average millennial (ages 22-33) that went to college earns almost $73,000, or more than double those who didn't graduate college.
5. Starting a new business
I might start to sound like a broken record here, but many people can earn a higher rate of return from a business than they can borrow for.
Starting a business can be somewhat riskier than the other opportunities on this list, but the rewards have the potential to be much higher. As long as you know what you're getting into, and don't borrow more than you could reasonably afford to lose if things don't go well, starting a business is a good reason to consider borrowing money.
The common theme
In short, wealthy people do a great job of using credit to their advantage. They look for opportunities to earn a higher return than the interest rate they can borrow money for and profit from the difference. In many cases, that's how they got wealthy in the first place...
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