Debt, used properly, makes you wealthy. Every billionaire you know has debt because of the advantages.
I grew up middle class. To afford my prestigeous university, I took out debt (before grant only financial aid). The value of my education allowed me to earn a higher salary to pay it off in two years. I kept earning that salary and more after the debt was paid. It had a high present value.
I bought my latest house four years ago. Mortgage rates were so low I decided to finance part of it at 2% even though I had the cash. I now earn 4.5% in money markets. After taxes, I earn 0.72% every year not to pay off my mortgage. With $350,000 remaining, this is an extra $2,500/year right now.
I shop with credit cards that give me 2-5% back on purchases. I pay off my balance every month and have never paid one penny in interest or penalties in over a decade. My credit cards therefore pay ~$1,500/year tax free.
Larry Ellison likes controlling Oracle and being a billionaire. Rather than selling stock of Oracle to fund his lifestyle, he instead borrows against the value of the stock. As Oracle appreciated, he got to keep the gains he doesn’t trigger capital gains taxes.
Most Americans do live paycheck to paycheck. They live at the ragged edge of their means and remain ignorant of finance. However, this is a global phenomenon. The difference is that much of the United States tax code is set up to benefit the wealthy. Adopt their habits and your wealth starts to snowball.
I shop with credit cards that give me 2-5% back on purchases. I pay off my balance every month and have never paid one penny in interest or penalties in over a decade. My credit cards therefore pay ~$1,500/year tax free.
I don’t really have anything to add as this is pretty much all spot on to how the wealthy live, but on this one I’d like to point out that you’re not actually making money - you’re just taking back part of the money that you already paid. That money isn’t paid by the credit card companies, they’d never be dumb enough to leave money on the table like that. They pay it through increased transaction fees for the businesses, who eat the extra cost through higher prices. There are states that do something similar with their recycling programs. They give you 5 cents per bottle you recycle at the center, but you paid a 5 cent bottle deposit when you bought them at the store. You’re not making any money, or even making back some of what you paid the store. You’re just getting your deposit back.
Maybe you somehow reduce your taxes by cycling that money through a cash back program? I’m not well versed on finances, so I won’t even try to theorize on that, but it certainly isn’t free money or something.
Yes, the credit card spending is technically a rebate, hence why it is tax free. However, I am going to purchase an identical basket of goods and services whether or not I use credit, so it is functionally identical.
Larry Ellison likes controlling Oracle and being a billionaire. Rather than selling stock of Oracle to fund his lifestyle, he instead borrows against the value of the stock. As Oracle appreciated, he got to keep the gains he doesn’t trigger capital gains taxes.
I never really understood this. He still has to pay the loan, and he isn’t doing that with his symbolic $1/year salary. What part am I missing?
As I understand it, one way is to just borrow again against similar stock. He borrows against stock bundle A for a while, and when that loan comes due, repays with a fresh loan against stock bundle B. A and B can be the same amount of stock, but as long as the line goes up, the loan against B more than repays the loan against stock A.
There’s intricacies and details in the process, but that’s how I understand the basic process goes.
Debt interest below investment yield means infinite money.
You’re missing the taxes they aren’t paying on the yield of the investment. That’s only taxed when sold. So if you borrow against investments tied up in the market then it never triggers the tax.
Theoretically their estate would get taxed on the value resulting in a nice cascade of tax triggers but they’re doing away with that asap.
You need to pay that loan with cash, right? I get that your assets secure the loan, but without another source of cash, how you pay back the loan and not sell your assets?
Can you provide an example? I’m not sure I get how that works out in their favor. In my view, paying debt with more debt is a terrible mistake and will get you in financial trouble. But I get that they have far more assets than I do. I just don’t quite see where it doesn’t go wrong.
To answer your question, you can borrow against equity tied up in assets without down payment. For example, if you have a house you can borrow against the value less any mortgage up to some percent of the total value. In my situation i can borrow up to 60% of the value of a house.
Down payments are for purchasing assets where the purchased asset will act as collateral. The idea is that the bank walks away with something if you immediately fail to pay on debts.
Stocks can act as equity assets in a similar way as the house. Equity loans generally have relatively low interest.
As a side note, this is all bullshit, interest is evil, and the system should be burnt to the ground and billionaires rotisseried over the coals for dinner.
I borrow $1000, assuring you I can pay you back because I have $5000 worth of stock.
A few years later, I borrow $5000, assuring you I can pay you back because I have $10000 worth of stock (it’s not more stock, it’s just worth more now). I use that $5000 to pay off the $1000 debt plus interest, and then have some left over.
Few years later, I borrow $10000, assuring you I can pay you back because I have $50,000 worth of stock. I use that $10000 to pay off the $5000 debt plus interest and then have some leftover.
Repeat as necessary. The bank does eventually get their money (when you die or are for some reason forced to sell, paying off the debt with cash rather than promises). To the bank this is an investment. To you, it’s a way to get cash without having to actually sell your stocks, avoiding taxes, and letting your value continue to skyrocket.
I guess the cycle continues if you will the stock to your children.
In the US at least, there is what’s called a “step-up in basis”, where when you do this, they receive the stock as if they had just bought it, instead of ‘inheriting’ the parent’s accumulated capital gains. In other words, if I bought a stock for $10 and it becomes worth $100, then I sell it, I’d pay capital gains tax on the $90 I made. But if the stock goes to my kid while it’s worth $100, it’s treated as if they bought it when it was worth $100 (which, in a way, is true, it is worth $100 at the time they gained possession of it), so if they sell it right after inheriting, they would pay no capital gains.
And if the stock tanks, then I guess you declare bankruptcy.
Yeah, ultimately, it is kind of a ‘house of cards’. The only way this strategy works at all is if the market value of the assets being used as collateral continuously increases, and not just increases, but increases at a greater rate than inflation and the interest rate on the debt, combined.
Debt, used properly, makes you wealthy. Every billionaire you know has debt because of the advantages.
I grew up middle class. To afford my prestigeous university, I took out debt (before grant only financial aid). The value of my education allowed me to earn a higher salary to pay it off in two years. I kept earning that salary and more after the debt was paid. It had a high present value.
I bought my latest house four years ago. Mortgage rates were so low I decided to finance part of it at 2% even though I had the cash. I now earn 4.5% in money markets. After taxes, I earn 0.72% every year not to pay off my mortgage. With $350,000 remaining, this is an extra $2,500/year right now.
I shop with credit cards that give me 2-5% back on purchases. I pay off my balance every month and have never paid one penny in interest or penalties in over a decade. My credit cards therefore pay ~$1,500/year tax free.
Larry Ellison likes controlling Oracle and being a billionaire. Rather than selling stock of Oracle to fund his lifestyle, he instead borrows against the value of the stock. As Oracle appreciated, he got to keep the gains he doesn’t trigger capital gains taxes.
Most Americans do live paycheck to paycheck. They live at the ragged edge of their means and remain ignorant of finance. However, this is a global phenomenon. The difference is that much of the United States tax code is set up to benefit the wealthy. Adopt their habits and your wealth starts to snowball.
I don’t really have anything to add as this is pretty much all spot on to how the wealthy live, but on this one I’d like to point out that you’re not actually making money - you’re just taking back part of the money that you already paid. That money isn’t paid by the credit card companies, they’d never be dumb enough to leave money on the table like that. They pay it through increased transaction fees for the businesses, who eat the extra cost through higher prices. There are states that do something similar with their recycling programs. They give you 5 cents per bottle you recycle at the center, but you paid a 5 cent bottle deposit when you bought them at the store. You’re not making any money, or even making back some of what you paid the store. You’re just getting your deposit back.
Maybe you somehow reduce your taxes by cycling that money through a cash back program? I’m not well versed on finances, so I won’t even try to theorize on that, but it certainly isn’t free money or something.
Yes, the credit card spending is technically a rebate, hence why it is tax free. However, I am going to purchase an identical basket of goods and services whether or not I use credit, so it is functionally identical.
I never really understood this. He still has to pay the loan, and he isn’t doing that with his symbolic $1/year salary. What part am I missing?
As I understand it, one way is to just borrow again against similar stock. He borrows against stock bundle A for a while, and when that loan comes due, repays with a fresh loan against stock bundle B. A and B can be the same amount of stock, but as long as the line goes up, the loan against B more than repays the loan against stock A.
There’s intricacies and details in the process, but that’s how I understand the basic process goes.
Debt interest below investment yield means infinite money.
You’re missing the taxes they aren’t paying on the yield of the investment. That’s only taxed when sold. So if you borrow against investments tied up in the market then it never triggers the tax.
Theoretically their estate would get taxed on the value resulting in a nice cascade of tax triggers but they’re doing away with that asap.
You need to pay that loan with cash, right? I get that your assets secure the loan, but without another source of cash, how you pay back the loan and not sell your assets?
Just keep borrowing and pay with that. Debt interest lower than yield.
Can you provide an example? I’m not sure I get how that works out in their favor. In my view, paying debt with more debt is a terrible mistake and will get you in financial trouble. But I get that they have far more assets than I do. I just don’t quite see where it doesn’t go wrong.
Do they not have to pay the principle?
Other reply was good.
To answer your question, you can borrow against equity tied up in assets without down payment. For example, if you have a house you can borrow against the value less any mortgage up to some percent of the total value. In my situation i can borrow up to 60% of the value of a house.
Down payments are for purchasing assets where the purchased asset will act as collateral. The idea is that the bank walks away with something if you immediately fail to pay on debts.
Stocks can act as equity assets in a similar way as the house. Equity loans generally have relatively low interest.
As a side note, this is all bullshit, interest is evil, and the system should be burnt to the ground and billionaires rotisseried over the coals for dinner.
I borrow $1000, assuring you I can pay you back because I have $5000 worth of stock.
A few years later, I borrow $5000, assuring you I can pay you back because I have $10000 worth of stock (it’s not more stock, it’s just worth more now). I use that $5000 to pay off the $1000 debt plus interest, and then have some left over.
Few years later, I borrow $10000, assuring you I can pay you back because I have $50,000 worth of stock. I use that $10000 to pay off the $5000 debt plus interest and then have some leftover.
Repeat as necessary. The bank does eventually get their money (when you die or are for some reason forced to sell, paying off the debt with cash rather than promises). To the bank this is an investment. To you, it’s a way to get cash without having to actually sell your stocks, avoiding taxes, and letting your value continue to skyrocket.
Okay. Thanks. That makes sense.
I guess the cycle continues if you will the stock to your children. So it could be decades until anyone pays taxes.
And if the stock tanks, then I guess you declare bankruptcy.
In the US at least, there is what’s called a “step-up in basis”, where when you do this, they receive the stock as if they had just bought it, instead of ‘inheriting’ the parent’s accumulated capital gains. In other words, if I bought a stock for $10 and it becomes worth $100, then I sell it, I’d pay capital gains tax on the $90 I made. But if the stock goes to my kid while it’s worth $100, it’s treated as if they bought it when it was worth $100 (which, in a way, is true, it is worth $100 at the time they gained possession of it), so if they sell it right after inheriting, they would pay no capital gains.
This is probably a large part of the reason that 70% of generational wealth is gone in two generations, and 90% in three, on average.
Yeah, ultimately, it is kind of a ‘house of cards’. The only way this strategy works at all is if the market value of the assets being used as collateral continuously increases, and not just increases, but increases at a greater rate than inflation and the interest rate on the debt, combined.