5 Ways Rich People Make Money With Debt
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
💸 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.
🏡 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.
💼 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
💡Interest
💡Consumer Debt
💡GDP (Gross Domestic Product)
💡Capitalism
💡Refinancing
💡Hedge Funds
💡Forex (Foreign Exchange)
💡Credit Score
💡Leverage
💡Equity
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
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 droning 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 has 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 unpopular opinion because most
of the debt we have
is 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 number one
most of the trade is based on that 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
the right price
you would purchase a container of pens
ship them to the 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 in the 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
number two 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 remember
every dollar that you 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
number three 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 to track you like facebook or
track your online activity and make
privacy their first priority
which 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 cost 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
a 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 blogger
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
number four forex we have already
discussed this in our forex video which
link 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 dollar 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 dollar in the market
and make us dollar 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 number five
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 is practiced pretty much by
every business so stop thinking in terms
all that is bad of course debts with a
high interest rate such as
credit card debts is 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 isn't any money
banks can create money out of thin year
and we have explained that
in a previous video anyways if you have
enjoyed this video
make sure to give it a thumbs up and if
you're new around here
subscribe and turn on your notifications
you're welcome to the channel where you
will learn
everything there is to know about money
investing in the stock market
thanks for watching and i will see you
in the next one
you
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