have you heard the phrase that is the root of all evils never gets into debt? that is slavery and that is true to a certain extent because when you’re drowning in debt your life is over while you’re trying to pay your debts. your debts are not waiting for you they’re growing day by day since no one lends money for free.
there is always an interest despite all of this, the united states have embraced that total u.s consumer debt is almost 15 trillion dollars. which brings the average household debt to over 5 300. the u.s GDP is a little over 21 trillion dollars, which means the entire economy consists out of that..
but I have some good news for you that isn’t always bad that is an unpopular opinion. because most of the debt we have is a bad debt you probably have some credit card debts a car loan and maybe a student debt and you’re thinking it will take me decades to pay off all of these debts.
how on earth can that be something good in order to understand how that can be something positive. let’s take a look at how people with deep pockets still use that to make even more money.
it might sound a bit confusing because why would anyone with a lot of money use debts in the first place that is supposed to be used by people who do not have money but that’s not how capitalism works that is a powerful tool if you know how to use it and in this video, you will find out how rich people use that to make even more money so give this video a thumbs up and let’s get right into it.
1. Most of the Trade is Based on DEBT
Number one Most of the Trade is Based on Debt. it might sound a bit controversial because borrowing money to start a business is a horrible idea and personally, I would never do that but there are businesses especially traditional businesses where using that is your best option.
let’s say you want to sell pens it’s a very common product and there’s pretty much always a demand for it. ideally, you would fly to China, find a factory that produces that kind of pen with good quality, and at the right price, you would purchase a container of pens ship them to us, and distribute them to your clients.
but today that’s mostly done online through websites like Alibaba unless it’s a more complicated product where you have to fly to that factory. but here is the catch you don’t really have to pay for the products to have the product first.
let me explain how in the past 50 years China has become the factory of the world producing literally everything thousands of factories work non-stop to produce everything that the world needs.
and in order to make it easier to sell most of these factories would gladly loan you their products in return that you would pay them some time in the future, of course, they would not lend to strangers so you will have to build some kind of trust with them first.
but that’s how business has been running for the past 50 years once the client would sell the product to us or any other part of the world he would pay the factory and borrow more products you’re basically telling the factory you know how to produce it so let me help you sell it. if I can sell it for anything above this price that’s going to be my profit what makes this strategy great is that you’re not tying up your own money in this transaction that’s why selling is one of the greatest skills you can ever master.
Refinancing real estate debts is the best kind of debt. because it’s filled with loopholes if you don’t have a mortgage then you’re paying extra taxes.
rich people always have multiple mortgages to be able to get all of those deductions to remember every dollar that you are supposed to pay in taxes. but instead, you save is an extra dollar earned so that’s another way rich people get richer.
but let me give you a more practical way this is how basically rich people get rich in real estate. let’s say you saved two hundred thousand dollars that’s a lot of money but if we’re going, to be honest, that’s peanuts you can’t even buy a house. of course, you can’t get a mortgage up to eight hundred thousand dollars, since you have to make a 20 down payment.
but here is the secret let’s say you find a property that costs half a million dollars. it’s in a bad condition and needs some or maybe a lot of renovation. you head to a bank and get a mortgage by making a 20 down payment let’s say you’re going to spend around 10 of the total cost of the house to renovate.
it or around 50,000 you head to your bank again but this time to refinance your mortgage. when you got your first mortgage the value of that property was just half a million dollars. because it was in such a bad condition that no one wanted to live there but since you have renovated it.
now there are people who want to rent it out so the market value of that property let’s say rises to seven hundred thousand dollars. like the first time let’s say you’re going to get an eighty percent mortgage, but eighty percent out of seven hundred thousand dollars is 560 000 400 000 out of that money is going to go to your first bank.
that gave you the first mortgage and let’s deduct another 50,000, that you spent on renovation and you’re going to be left with an extra profit of a hundred and ten thousand dollars. you made one hundred and ten thousand dollars using that and you’re left with a property that you can rent out to build equity and generate passive income.
on top of that you are going to avoid paying taxes because you have a mortgage this is a very common practice among real estate investors can you really see after this that that is bad I will leave that for you to answer in the comment section below.
3. Hedge Funds
Hedge Funds are made by the rich for the rich to make rich people richer, and they usually use unpopular strategies mortal people like me and you. we make our best efforts to predict which companies are going to grow and rise in value and invest the money.
we work so hard to earn in hopes for these companies to grow. but hedge funds often use a completely opposite strategy they try to make money when companies fall or go bankrupt.
as it was with the case of GameStop, although in that case the internet challenged hedge funds and pushed them to lose over 13 billion dollars. but how do hedge funds make money with debt?
let’s say you expect a certain stock to decline like Facebook because you know that apple who produces the most popular smartphone will announce next week that they will no longer let apps track you like Facebook or Instagram. track your online activity and make privacy.
their first priority will greatly damage facebook’s business model, so you pick up your phone and call your broker to borrow from him a single facebook stock that costs let’s say a hundred dollars, and instantly sell it in the open market for a hundred dollars. congrats now you have a hundred dollars in your pocket but you still owe your broker one Facebook stock.
let’s say you are right and next week facebook stock price drops to 70 dollars you use that hundred dollars to buy one facebook stock for 70 dollars since the price dropped and return it to your broker and pocket the difference. congrats you’ve made 30 out of a full of stock.
it sounds simple in theory but it’s extremely difficult and risky in practice what happens if you’re wrong what if the price doubles overnight, you still have to return that single Facebook stock to your broker and pay interest for borrowing that stock.
now you have to buy that stock back for 200 to return it to your broker when you buy a stock and try to sell it when it rises the maximum. that you can lose is the amount you invested in but not in the case of shorting if the price keeps rising your losses keep rising theoretically you can make unlimited losses since theoretically the stock price can rise indefinitely but if you have a hundred analysts working for you you can make a fortune using this strategy.
Forex we have already discussed this in our forex article, which links I will leave in the comments section, but here is how it works.
in short, forex is a market where currencies are traded it makes international trade possible. you can use US dollars in China, you have to buy Chinese yen to pay your employees.
for example in china so there is a market where anyone or any company can come in and purchase foreign currencies, and based on different factors these currencies fluctuate. for example, the fed raises interest rates that will limit the supply of dollars in the market and make us dollars stronger against other currencies or vice versa.
so if you can predict which currencies will rise or fall you can make a lot of money in this market, but what makes these markets so different from the rest is that for every dollar you use to trade in forex you can borrow an additional hundred dollars. that means if you trade using your thousand dollars you can hold a position worth a hundred thousand dollars if you end up making a small profit like one percent it will be huge.
5. Credit Score
Credit Score as you can see that is a powerful tool. every successful business company or entrepreneur uses that in various ways, especially if you have a proven business model, borrowing money to finance, purchase orders are practiced pretty much by every business.
so stop thinking in terms of all that is bad of course debts with a high interest rate such as credit card debts are horrible. but in order to get a lower interest rate you have to minimize the risks of loaning you money.
how do you do that you build a track record of being a reliable borrower? there are billions if not trillions of dollars in the banks waiting for someone to borrow them, and even if there aren’t any money banks can create money out of the thin year and we have explained that in a previous article.