Borrowing money may seem like something you only do if you dont have enough of it, but thats not true. There are many wealthy people who take on debt; they just do it in different ways than their less-well-off counterparts do.
Of course, not every rich person has exactly the same money habits. But here are four borrowing rules the wealthy tend to follow that others often dont.
Many people assume that once you become a millionaire you no longer have any debt. The image of a millionaire conjures up someone living in a paid-off mansion, driving expensive cars owned outright and enjoying lavish vacations without worrying about balances on their credit cards. However, the reality is that most millionaires do carry some debt as part of their overall financial strategy.
Why Millionaires Take on Debt
There are a few key reasons why millionaires tend to utilize debt as part of their investment strategy:
They Find Tax Advantages and Strategic Leverage
Millionaires will review their debts and determine if there are tax benefits for certain debts. For instance, mortgage interest and business debt may carry certain tax advantages. Sometimes wealthier individuals use debt to leverage investments.
They Understand the Time Value of Money
Wealthy individuals realize that over time, inflation reduces the value of money. If they can borrow money at a lower interest rate while their investments earn a higher return, they come out ahead financially in the long run. Paying off a mortgage early may not make sense if that money could be invested for higher gains instead.
They Build Their Credit Profile
To have access to the best rates and loan terms, millionaires aim to maintain excellent credit. Carrying some manageable debt and reliably making payments helps to build a strong credit score. Poor credit can become expensive with higher interest rates
They Keep Liquidity
Millionaires tend to keep a large portion of their net worth tied up in investments Maintaining liquidity via credit lines and loans provides flexibility to quickly access cash for major purchases or investments without liquidating their assets,
What Types of Debt Do Millionaires Use?
While they may carry debt, millionaires tend to only utilize “good” debt with reasonable interest rates that can be managed as part of their total financial picture. Here are some examples:
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Mortgages – Mortgages allow real estate investors to finance properties and benefit from appreciation and rents with just a portion of the purchase price upfront. The interest expense may also provide tax deductions.
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Business Loans – Money borrowed to start or expand a business. The potential growth of the business should surpass the cost of borrowing.
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Securities-Backed Loans – Wealthy individuals can tap into their investment portfolio value by using securities as collateral for low-interest loans while avoiding capital gains taxes.
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Car Loans – Even millionaires may finance expensive luxury vehicles to maintain liquidity. They shop for the best rates and terms.
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Credit Cards – Millionaires frequently use credit cards for convenience and to gain rewards points. But they avoid interest by paying balances off each month.
While they may strategically employ debt, millionaires are careful to not overextend themselves. They analyze the total debt burden in relation to their income and assets. Conservative use of debt helps to steadily build wealth over the long-term.
Millionaires Stay Focused on Long-Term Goals
Becoming a millionaire is generally not an overnight process. It involves years of discipline, investing and strategic money management. Once their net worth reaches the million dollar mark, most millionaires continue the habits that got them there. They:
- Live below their means
- Maximize income potential
- Invest early and consistently
- Limit lifestyle inflation
- Use debt strategically
- Build solid credit
- Safeguard their assets
Avoiding all debt may actually inhibit a millionaire’s ability to continue growing their wealth. Maintaining some debt shows fiscal responsibility and helps protect their assets while taking advantage of strategic opportunities. For the wealthy, debt is simply one component of an overall financial blueprint focused on long-term goals.
While the average person may dream of being totally debt-free, most millionaires take a more nuanced approach. They analyze debts based on their financial situation and potential returns on investments. Some debt helps build their credit profile, provides tax deductions, and keeps asset liquidity intact. As long as they avoid risky credit behavior and maintain reasonable debt-to-income ratios, leveraging debt in a controlled manner can facilitate building assets over time. For millionaires, carrying debt is not antithetical to being wealthy, but can be one carefully-deployed component of a savvy investment strategy.
Make lenders work for your business
Finally, rich people dont just accept whatever loan theyre offered on whatever terms the lender wants to give them. They often make lenders work for their business.
This could involve doing something as simple as shopping around to get different quotes before deciding which bank or credit union to take a loan from. Simply comparing offers allows you to go with the company that gives you the best deal — rather than just going with a financial institution you happen to find first.
Wealthy people sometimes take this process even further. They may ask for discounts on fees or other special borrowing perks, especially if they have a relationship with the lenders and can leverage that into getting better loan terms.
The good news is, you can follow all these rules even if you arent already wealthy. And doing so could help you become rich yourself over time.
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How Rich People Use Debt to Build Wealth (…and YOU can, too!)
FAQ
Do millionaires use debt?
And even for people who may not be able to leverage a Dali painting hanging in their foyers, debt can be a useful tool to keep their wealth engines running if it comes cheaply enough relative to other opportunities, keeps their assets working for them and, above all, if the risks are understood and tolerable.
What percentage of millionaires are in debt?
They avoid debt
In fact, 73% of millionaires surveyed in the US have never carried a credit card balance,1 while 56% of active credit card accounts in the United States currently have a balance. One big exception is mortgages, and even some of the super-rich use mortgages when buying their homes.
How do 90% of millionaires make their money?
Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.
Do wealthy people have credit card debt?
Yes, wealthy people can and often do have credit card debt. Having a high income or significant wealth does not automatically exempt someone from borrowing or using credit. Here are a few reasons why wealthy individuals might carry credit card debt: