5 Ways Rich People Make Money With Debt

Proactive Thinker
23 Jun 202111:08

Summary

TLDRThis video script explores the paradoxical role of debt in wealth creation, challenging the common belief that debt is purely detrimental. It delves into how the wealthy leverage debt to enhance their wealth through various strategies, such as trade without upfront payment, real estate refinancing, hedge funds, forex trading, and maintaining a strong credit score. The script aims to educate viewers on the potential positive aspects of debt when used wisely in the context of capitalism.

Takeaways

  • 💸 Debt is often considered a burden, but it can also be a tool for wealth creation when used wisely by those with deep pockets.
  • 🏭 Many businesses, especially traditional ones, use trade credit to source products without upfront payment, leveraging the production capabilities of countries like China.
  • 🔑 Building trust with suppliers can allow businesses to access products on credit, which is a powerful strategy for leveraging limited capital.
  • 🏠 Real estate debt, particularly when used for refinancing, can be a lucrative opportunity due to the potential for property value appreciation and tax deductions.
  • 💰 The strategy of buying a property in poor condition, renovating it, and refinancing the mortgage can yield significant profits and create passive income streams.
  • 📉 Hedge funds often employ debt to profit from market downturns, using strategies like short selling to capitalize on falling stock prices.
  • 🤑 The potential for high returns in hedge funds comes with high risk, as incorrect predictions can lead to unlimited losses due to the nature of short selling.
  • 🌐 Forex trading allows for significant leverage, where a small investment can control a much larger position in currency markets, magnifying both potential gains and losses.
  • 📈 Understanding market dynamics and currency fluctuations is crucial for success in forex trading, where debt is used to amplify trading positions.
  • 💳 A good credit score is essential for securing favorable loan terms, which can be vital for businesses to grow and for individuals to manage debt wisely.
  • 📊 While high-interest debt is detrimental, strategic use of debt at lower interest rates can be beneficial for business expansion and wealth accumulation.

Q & A

  • What is the phrase that is often considered the root of all evils according to the script?

    -The phrase mentioned in the script is 'the love of money,' which is often considered the root of all evils.

  • How much is the total U.S consumer debt mentioned in the script?

    -The total U.S consumer debt mentioned in the script is almost 15 trillion dollars.

  • What is the average household debt in the U.S. as per the script?

    -The average household debt in the U.S. is over 5,300 dollars.

  • What is the U.S GDP mentioned in the script, and how does it relate to the economy and debt?

    -The U.S GDP is a little over 21 trillion dollars. The script suggests that the entire economy consists out of that, indicating the scale of the debt in relation to the country's economic output.

  • What is the script's stance on most of the debt we have?

    -The script suggests that most of the debt we have is bad debt, such as credit card debts, car loans, and student debt.

  • How does the script describe the use of debt by people with deep pockets?

    -The script describes the use of debt by wealthy individuals as a powerful tool if used correctly, suggesting that they use it to make even more money.

  • What is the first strategy mentioned in the script for using debt to make money?

    -The first strategy mentioned is using trade to sell products without having to pay for them upfront, by building trust with manufacturers and selling their products on credit.

  • What is refinancing real estate debts, and how is it used as a loophole to make money?

    -Refinancing real estate debts involves getting a new mortgage on a property after its value has increased, allowing the owner to pay off the original mortgage and have extra money, which can be used to generate passive income and avoid taxes.

  • How do hedge funds use debt to make money, and what is their strategy?

    -Hedge funds often use a strategy of short selling, where they borrow stocks they expect to decline, sell them, and then buy them back at a lower price to return to the lender, profiting from the difference.

  • What is the role of credit score in the context of the script?

    -In the script, a good credit score is portrayed as a powerful tool that allows successful businesses and entrepreneurs to borrow money at lower interest rates, which is essential for financing purchase orders and growing their businesses.

  • How does the script describe the potential risks and rewards of using debt in the forex market?

    -The script describes the forex market as a place where traders can borrow up to 100 times their initial investment, which can lead to significant profits if they correctly predict currency movements, but also carries the risk of substantial losses if predictions are incorrect.

Outlines

00:00

💸 The Double-Edged Sword of Debt

The script begins by addressing the common belief that debt is the root of all evils, highlighting the burden it can impose on individuals. It then contrasts this with the reality in the United States, where consumer debt has reached nearly 15 trillion dollars, averaging over 5,300 per household. The script introduces the concept that debt isn't always detrimental, especially when viewed through the lens of wealthy individuals who leverage it as a tool for wealth accumulation. The video promises to explore how the rich use debt to increase their wealth, starting with the premise that most trade is credit-based, allowing businesses to operate without tying up their own capital. The summary also touches on the importance of understanding the nature of debt and how it can be harnessed positively in the world of business and finance.

05:02

🏡 Leveraging Real Estate Debt for Profit

This paragraph delves into the strategic use of debt in real estate investments, particularly through refinancing. It explains how wealthy individuals can acquire a property in need of renovation, secure a mortgage, and then increase the property's value through improvements. By refinancing the mortgage at the new, higher market value, they can extract equity, realizing a profit and leaving them with an asset that generates passive income. The summary outlines the process, emphasizing the tax benefits and the potential for wealth creation through strategic debt management in the real estate market.

10:03

💼 Capitalizing on Market Volatility with Hedge Funds and Forex

The script discusses how the wealthy use hedge funds and forex trading to capitalize on market volatility. Hedge funds employ strategies that profit from the decline of companies, as illustrated by the GameStop case, where internet users challenged hedge fund strategies. The summary explains the concept of short selling, where investors borrow stock, sell it, and then buy it back at a lower price to return to the lender, profiting from the price drop. It also touches on forex trading, where investors can leverage their capital significantly to profit from currency fluctuations, highlighting the high-risk, high-reward nature of these financial instruments.

🔍 The Power of Credit in Business Expansion

The final paragraph emphasizes the importance of credit in business growth, particularly for companies with a proven business model. It explains that borrowing money to finance orders is a common practice that allows businesses to expand without relying solely on their own capital. The summary stresses the significance of building a strong credit score and a track record as a reliable borrower to secure favorable loan terms, which can be instrumental in the success and growth of a business.

Mindmap

Keywords

💡Debt

Debt refers to an obligation that an individual or entity owes to another. It is a central theme in the video, illustrating how being in debt can be burdensome and likened to 'slavery' due to the constant pressure of repayment. The script discusses the high levels of U.S. consumer debt and how it affects the economy, but also explores the idea that not all debt is detrimental, especially when used strategically by the wealthy.

💡Interest

Interest is the cost of borrowing money, typically expressed as a percentage of the amount borrowed. In the video, it is mentioned that no one lends money for free, implying that interest is an inherent part of debt. It is a key factor in the growth of debt over time and is a significant component of the financial burden that debtors face.

💡Consumer Debt

Consumer debt is the money owed by individuals resulting from borrowing to finance consumption spending. The video script highlights the staggering figure of total U.S. consumer debt, which averages to over $5,300 per household. This concept is integral to understanding the scale of debt in the economy and its impact on individual financial health.

💡GDP (Gross Domestic Product)

GDP measures the economic output of a country, defined as the total value of goods and services produced over a specific time period. The script uses the U.S. GDP of a little over 21 trillion dollars to contextualize the proportion of the economy that is comprised of debt, emphasizing the scale of financial activity in the country.

💡Capitalism

Capitalism is an economic system based on private ownership of the means of production and their operation for profit. The video discusses how debt is not only a tool for those without capital but also a powerful instrument in the hands of those with deep pockets in a capitalist society, who can use it to generate more wealth.

💡Refinancing

Refinancing refers to the process of replacing an existing loan with a new one, typically to achieve lower interest rates or change loan terms. In the context of the video, refinancing real estate debts is presented as a strategy used by the wealthy to exploit loopholes and increase their wealth through tax deductions and property value appreciation.

💡Hedge Funds

Hedge funds are investment funds that pool capital from accredited investors or institutional investors and invest in a variety of assets, often using complex strategies. The script explains how hedge funds are used by the rich to make even more money, employing strategies such as short selling, which can be profitable when a company's value declines.

💡Forex (Foreign Exchange)

Forex is the market where currencies are traded globally. The video briefly touches on how the Forex market facilitates international trade and how currency fluctuations can be predicted for profit. It also mentions the high leverage available in Forex trading, which can amplify profits but also carries significant risk.

💡Credit Score

A credit score is a numerical expression based on a level analysis of a person's credit files, used to predict the likelihood that the person will pay their debts. The video emphasizes the importance of a good credit score for obtaining lower interest rates on loans, which is essential for businesses to finance their operations effectively.

💡Leverage

Leverage in finance refers to the use of borrowed money to increase the potential return of an investment. The script explains how leverage is used in Forex trading, allowing traders to control a large position with a relatively small amount of capital, thus magnifying both potential profits and losses.

💡Equity

Equity refers to the value of an investment or property after subtracting any liabilities. In the video, the concept of equity is used to describe the process of building wealth through property ownership, where the property's value increases over time, and the mortgage holder benefits from the appreciation.

Highlights

The phrase 'debt is the root of all evil' is discussed, suggesting that being in debt can be a form of modern-day slavery due to the constant growth of debt with interest.

The total U.S consumer debt is nearly 15 trillion dollars, averaging over 5300 per household, with the U.S GDP being a little over 21 trillion dollars.

A counter-intuitive perspective is presented that not all debt is bad, and it can be used as a tool by those who understand its mechanisms.

Most trade is based on credit, allowing businesses to operate without tying up their own capital in transactions.

Factories in China often loan their products to businesses, trusting that they will be paid back once the products are sold.

Refinancing real estate debts is highlighted as a strategy rich people use to leverage loopholes and deductions for tax benefits.

A practical example is given on how to profit from real estate by refinancing mortgages after property renovation, avoiding high taxes.

Hedge funds are explained as tools used by the rich to make more money, often employing strategies that profit from companies' decline.

The risky strategy of short selling in stock markets is detailed, where borrowing stock to sell with the expectation of buying it back at a lower price is discussed.

Forex trading is introduced as a market where currencies are traded, allowing for significant profit through leverage and correct predictions of currency fluctuations.

The importance of a good credit score for businesses and entrepreneurs to secure loans at lower interest rates is emphasized.

The video encourages viewers to rethink their perspective on debt, suggesting that it can be a powerful tool when used wisely.

A call to action is made for viewers to like the video and subscribe for more content on money, investing, and the stock market.

The video promises to educate viewers on everything related to finance, offering a comprehensive guide to understanding money and investments.

A reminder is given that while high-interest debt like credit card debt is detrimental, strategic use of debt can lead to financial success.

The video concludes with an invitation for viewers to join the channel and learn about making money through smart financial decisions.

Transcripts

play00:02

have you heard the phrase

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that is the root of all evils never gets

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into debt

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that is slavery and that is true to a

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certain extent

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because when you're droning in debt your

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life is over

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while you're trying to pay your debts

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your debts are not waiting for you

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they're growing day by day since no one

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lends money for free

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there is always an interest despite all

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of this

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the united states has embraced that

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total u.s consumer debt

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is almost 15 trillion dollars which

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brings the average household debt

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to over 5 300

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the u.s gdp is a little over 21 trillion

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dollars

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which means the entire economy consists

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out of that

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but i have some good news for you that

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isn't always bad

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that is unpopular opinion because most

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of the debt we have

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is bad debt you probably have some

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credit card debts

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a car loan and maybe a student debt and

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you're thinking

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it will take me decades to pay off all

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of these debts

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how on earth can that be something good

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in order to understand how that can be

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something positive

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let's take a look at how people with

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deep pockets

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still use that to make even more money

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it might sound a bit confusing because

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why would anyone with a lot of money use

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debts in the first place

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that is supposed to be used by people

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who do not have money

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but that's not how capitalism works that

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is a powerful tool if you know how to

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use it

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and in this video you will find out how

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rich people

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use that to make even more money so give

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this video a thumbs up

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and let's get right into it number one

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most of the trade is based on that it

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might sound a bit controversial

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because borrowing money to start a

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business is a horrible idea

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and personally i would never do that but

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there are businesses especially

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traditional businesses where using that

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is your best option let's say you want

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to sell pens

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it's a very common product and there's

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pretty much always a demand for it

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ideally you would fly to china find a

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factory that produces

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that kind of pen with good quality and

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the right price

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you would purchase a container of pens

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ship them to the us

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and distribute them to your clients but

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today

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that's mostly done online through

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websites like alibaba

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unless it's a more complicated product

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where you have to fly to that factory

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but here is the catch you don't really

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have to pay for the products

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to have the product first let me explain

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how

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in the past 50 years china has become

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the factory of the world

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producing literally everything thousands

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of factories work

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non-stop to produce everything that the

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world needs

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and in order to make it easier to sell

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most of these factories would gladly

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loan you their products

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in return that you would pay them some

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time in the future

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of course they would not lend to

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strangers so you will have to build

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some kind of trust with them first but

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that's how business has been running

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for the past 50 years once the client

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would sell the product in the us

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or any other part of the world he would

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pay the factory

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and borrow more products you're

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basically telling the factory

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you know how to produce it so let me

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help you

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sell it if i can sell it for anything

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above this price

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that's going to be my profit what makes

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this strategy

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great is that you're not tying up your

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own money in this transaction

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that's why selling is one of the

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greatest skills you can ever master

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number two refinancing real estate debts

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is the best kind of debt because it's

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filled with loopholes

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if you don't have a mortgage then you're

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paying extra taxes

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rich people always have multiple

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mortgages to be able

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to get all of those deductions remember

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every dollar that you supposed to pay in

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taxes

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but instead you save is an extra dollar

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earned

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so that's another way rich people get

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richer but let me give you

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a more practical way this is how

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basically rich people get rich in real

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estate

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let's say you saved two hundred thousand

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dollars that's a lot of money

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but if we're going to be honest that's

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peanuts

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you can't even buy a house of course you

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can't get a mortgage up to eight hundred

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thousand dollars

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since you have to make a 20 down payment

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but here is the secret let's say you

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find a property that costs

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half a million dollars it's in a bad

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condition

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and needs some or maybe a lot of

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renovation you head to a bank and get a

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mortgage by making

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a 20 down payment let's say you're going

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to spend around 10

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of the total cost of the house to

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renovate it or around 50

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000 you head to your bank again but this

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time to refinance your mortgage

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when you got your first mortgage the

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value of that property was just half a

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million dollars

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because it was in such a bad condition

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that no one wanted to live there

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but since you have renovated it now

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there are people who want to rent it out

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so the market value of that property

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let's say rises

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to seven hundred thousand dollars like

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the first time

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let's say you're going to get an eighty

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percent mortgage

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but eighty percent out of seven hundred

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thousand dollars

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is 560 000

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400 000 out of that money is going to go

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to your first bank

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that gave you the first mortgage and

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let's deduct another 50

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000 that you spent on renovation and

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you're going to be left

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with an extra profit of a hundred and

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ten thousand dollars

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you made one hundred and ten thousand

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dollars using that

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and you're left with a property that you

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can rent out to build equity

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and generate passive income on top of

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that

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you are going to avoid paying taxes

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because you have a mortgage

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this is a very common practice among

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real estate investors

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can you really see after this that that

play06:03

is bad

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i will leave that for you to answer in

play06:06

the comment section below

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number three hedge funds hedge funds are

play06:11

made

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by the rich for the rich to make rich

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people richer

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and they usually use unpopular

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strategies mortal people like me and you

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we make our best efforts to predict

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which companies are going to grow and

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rise in value

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and invest the money we work so hard to

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earn in hopes for these companies to

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grow

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but hedge funds often use a completely

play06:32

opposite strategy

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they try to make money when companies

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fall or go bankrupt

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as it was with the case of gamestop

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although in that case

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the internet challenged hedge funds and

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pushed them to lose

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over 13 billion dollars but how do hedge

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funds make money with debt

play06:50

let's say you expect a certain stock to

play06:52

decline like facebook because

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you know that apple who produces the

play06:56

most popular smartphone

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will announce next week that they will

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no longer let

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apps to track you like facebook or

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instagram

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track your online activity and make

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privacy their first priority

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which will greatly damage facebook's

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business model

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so you pick up your phone and call your

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broker to borrow from him

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a single facebook stock that cost let's

play07:18

say a hundred dollars

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and instantly sell it in the open market

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for a hundred dollars

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congrats now you have a hundred dollars

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in your pocket

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but you still owe your broker one

play07:30

facebook stock

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let's say you are right and next week

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facebook stock price

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drops to 70 dollars you use that hundred

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dollars to buy one

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facebook stock for 70 dollars since the

play07:42

price dropped

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and return it to your broker and pocket

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the difference

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congrats you've made 30 out of a full of

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a stock

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it sounds simple in theory but it's

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extremely difficult and risky in

play07:55

practice

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what happens if you're wrong what if the

play07:58

price doubles overnight

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you still have to return that single

play08:01

facebook stock to your blogger

play08:03

and pay interest for borrowing that

play08:05

stock now you have to buy that stock

play08:08

back for 200

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to return it to your broker when you buy

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a stock and try to sell it when it rises

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the maximum that you can lose is the

play08:16

amount you invested in

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but not in the case of shorting if the

play08:20

price keeps rising

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your losses keep rising theoretically

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you can make unlimited losses since

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theoretically

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the stock price can rise indefinitely

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but if you have a hundred analysts

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working for you

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you can make a fortune using this

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strategy

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number four forex we have already

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discussed this in our forex video which

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link i will leave in the comments

play08:43

section

play08:44

but here is how it works in short forex

play08:47

is a market where currencies are traded

play08:49

it makes international trade possible

play08:52

you can use us dollar in china

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you have to buy chinese yen to pay your

play08:56

employees for example

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in china so there is a market where

play09:00

anyone or

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any company can come in and purchase

play09:03

foreign currencies

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and based on different factors these

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currencies

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fluctuate for example the fed raises

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interest rates that will limit the

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supply of dollar in the market

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and make us dollar stronger against

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other currencies

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or vice versa so if you can predict

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which currencies will rise or fall

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you can make a lot of money in this

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market but

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what makes these markets so different

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from the rest is that

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for every dollar you use to trade in

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forex

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you can borrow an additional hundred

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dollars

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that means if you trade using your

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thousand dollars

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you can hold a position worth a hundred

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thousand dollars

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if you end up making a small profit like

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one percent

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it will be huge number five

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credit score as you can see that is a

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powerful tool

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every successful business company or

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entrepreneur

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uses that in various ways especially if

play10:01

you have a proven business model

play10:03

borrowing money to finance purchase

play10:05

orders is practiced pretty much by

play10:07

every business so stop thinking in terms

play10:10

all that is bad of course debts with a

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high interest rate such as

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credit card debts is horrible but in

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order to get a lower interest rate

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you have to minimize the risks of

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loaning you money

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how do you do that you build a track

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record of being a reliable borrower

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there are billions if not trillions of

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dollars in the banks

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waiting for someone to borrow them and

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even if there isn't any money

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banks can create money out of thin year

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and we have explained that

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in a previous video anyways if you have

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enjoyed this video

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make sure to give it a thumbs up and if

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you're new around here

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subscribe and turn on your notifications

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you're welcome to the channel where you

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will learn

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everything there is to know about money

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investing in the stock market

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thanks for watching and i will see you

play10:56

in the next one

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you

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