It might seem like you only borrow money when you don’t have enough, but that’s not the case. 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:
-
Mortgages—Mortgages let real estate investors buy homes with only a portion of the purchase price up front and profit from property values rising and rents rising. The interest expense may also provide tax deductions.
-
Business loans are loans that are used to start or grow a business. The business should be able to grow faster than the cost of borrowing money.
-
Securities-Backed Loans: Rich people can borrow money against the value of their investments and avoid paying capital gains taxes by using their securities as collateral for low-interest loans.
-
Car Loans – Even millionaires may finance expensive luxury vehicles to maintain liquidity. They shop for the best rates and terms.
-
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.
The average person may wish they had no debt, but most millionaires have a more nuanced view. They look at debts based on their current financial situation and the money they could make from investments. Some debt helps them build their credit, saves them money on taxes, and keeps their assets liquid. Leveraging debt in a smart way can help people build assets over time, as long as they don’t do risky credit activities and keep their debt-to-income ratios in check. Being rich doesn’t mean having a lot of debt for millionaires; in fact, it can be a smart way to invest their money.
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.
Alert: highest cash back card we’ve seen now has 0% intro APR until 2024
If youre using the wrong credit or debit card, it could be costing you serious money. Our expert loves this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
Were firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
This data feed is not available at this time.
How Rich People Use Debt to Build Wealth (…and YOU can, too!)
FAQ
Do millionaires use debt?
Also, debt can help people keep their wealth engines running even if they can’t use the Dali painting in their foyer as collateral. This is only true if the debt is cheap compared to other opportunities, keeps the assets working for the person, and the risks are understood and accepted.
What percentage of millionaires are in debt?
They stay out of debt. In fact, 2073 percent of millionaires surveyed in the US have never had a credit card balance, while 2056 percent of active credit card accounts in the US 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: