Most people think of debt as a bad thing, something that threatens your wealth and reduces your net worth. And most financial advisors would likely agree — just tune into any five minutes of personal finance guru Dave Ramsey’s show to hear how devastating debt can be.
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But for the super wealthy? Not so much. In fact, those in the upper class often use personal loans — something the rest of us avoid like kale-wrapped tofu — to boost their bottom line. Here’s how they do it.
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Buy, Borrow, Die
Yes, dying is a part of a successful wealth-building strategy. First, after buying real estate, stock and other valuable assets, the wealthy borrow against those assets. This way, they can access their equity without selling and triggering capital gains, while also allowing their assets to grow in value.
When they die, the assets are passed to their heirs, who also pay no taxes on the gains the assets made during the deceased’s lifetime. Et voila — the buy, borrow and die strategy.
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Fund New Investments
The wealthy often use personal loans to finance new ventures or investments. For instance, if a new investment pays more than the interest on the loan, it’s a win. Stakes in businesses, start-ups and other opportunities often offer returns higher than personal loans. In this way, they avoid risking their own money to increase their net worth.
Pay Taxes
Yep, you heard that right. The wealthy can actually make money by paying their taxes with personal loans. For example, assume two multi-millionaires have $30 million invested in an S&P 500 index fund that returns an average of 13.81% per year, and both owe $3 million in taxes. Now, assume millionaire A sells $3 million of his portfolio to pay taxes and millionaire B takes out a loan. After five years, millionaire B’s stock portfolio stands at $57.3 million, minus about $3 million in interest. Millionaire A’s portfolio, on the other hand, is only worth $34.8 million.
Strengthen Their Credit
By taking out loans rather than using cash, then paying those loans down on time, the wealthy increase their creditworthiness. This in turn earns them better terms, lower interest rates and higher limits, which gives them even more power to use their various personal loan strategies to protect and increase their net worth. They also often enjoy more flexibility in their repayment options.
Enjoy Tax Advantages
Borrowing against assets can often minimize tax obligations. As mentioned above, the wealthy can avoid capital gains taxes by not having to sell assets like real estate and stocks. In addition, the interest they pay on loans used to fund certain investments or business expenses is sometimes tax deductible, which further lowers their taxable income.
Quick Cash
It takes time to sell a home, car or jewelry. So, the upper class often use personal loans as a sort of emergency liquidity when they see a good investment opportunity. Rather than taking the time to liquidate an asset or sell stocks — potentially triggering taxes — because of their wealth, a personal loan is often easy to get and faster. Like they say, it takes money to make money — and sometimes to borrow it.
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This article originally appeared on GOBankingRates.com: 6 Ways the Upper Class Uses Personal Loans to Their Advantage
