5 Ways Rich People Use Credit

Many people think the rich don't borrow money, but the truth is quite the opposite. The difference is in what they borrow money for.

Jun 29, 2014 at 12:29PM

CreditFlickr / Sean MacEntee.

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.

Taxes

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.

College Grads

flickr/ Sakeeb Sabakka

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...

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers