5 Ways Rich People Make Money With Debt

Summary

This 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.

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

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

instagram

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

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thanks for watching and i will see you

in the next one

you