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How to Make Money Using Debt

Justice is a business owner. He has been running multiple online businesses for the past 5 years.


Mark Zuckerberg secured a 30-year mortgage in July 2012 to pay for his $5.95 million Palo Alto house, which is only 3 miles from Facebook's corporate headquarters. He was the 40th richest person in the world at the age of 28, with an estimated net worth of $15.6 billion. Why would you go into debt if you had billions of cash and the means to pay it off easily? He could pay cash for a few mansions valued at $6 million without batting an eye if he so desired. Why therefore obtain a mortgage? The answer is lengthy and intricate, but it's basically free money. Who would give you free money when you are already a billionaire, it seems absurd.

Interest rates are a prominent theme throughout. Any money you borrow that is below the inflation rate is seen as free money because the inflation rate in the US is between 2.5 and 3 percent. Although Zuckerberg's mortgage rate is only slightly over 1.05%, it is adjustable, which means that depending on the situation, the rate may increase for any number of reasons. The bank loses since the mortgage rate is less than the inflation rate, according to the calculations.

To perform math, you don't need to be brilliant. Let's imagine, for demonstration purposes, that you take out a $1 million loan at a 1% interest rate. The savings account's average annual return is 2.4 percent.Therefore, if you deposit that $1 million in a different bank, you will earn $24,000 a year while only having to pay the bank that lent you the money a monthly payment of $10,500. Think about what would happen if you did that with $100,000,000 or $1 Billion!

There is no benefit to holding onto your own money when you can borrow for next to nothing and spend that money for more useful endeavors. Naturally, when dealing with smaller sums of money, this might not make sense because the difference isn't that great; however, when dealing with significant sums, fiddling with 1%, 2% or 5% might possibly equal hundreds of thousands of dollars. If you're a businessman who can easily afford a million-dollar home, why spend that much money on a house when you can finance one for just 1 or 2 percent and use the rest to invest in your company, which has the potential to yield returns of 10, 20, or even 30 percent? Investing all of your money in an index fund can be beneficial even if you are too lazy to discover a more profitable way to spend it. Particularly when 20 or 30 years are involved.

An index fund has historically generated an 8 percent average return. The percentage difference will go in your pocket if you take out a mortgage and invest your money in an index fund. The main factor is opportunity cost. Zuckerberg has been given a 1 percent mortgage rate, so it wouldn't make financial sense for him to pay cash for the home. He is not the only person, though, who is that clever as to accomplish that. Consider Elon Musk, whose companies SpaceX and Tesla account for the majority of his wealth.

He might need to sell a sizable portion of his fortune, pay taxes, and incur other costs in order to purchase a mansion for $20 million, but he can accept free money and maintain his monthly payment within his budget. He obtained a 61 million dollar mortgage for five residences in California with a 180 000 dollar monthly payment. It's not just billionaires who do it; relatively wealthy folks like Jay Z and Beyoncé also engage in it. To purchase their 88 million dollar home, they took out a mortgage. They made a down payment of 40% and financed the remaining $52.8 million. The pair is now responsible for paying a monthly loan of $149,000. Comparatively, the national median home value is $200,700. He obviously knows where to invest his 53 million dollars in order to optimize his return rather than cleaning up a house with it. He has surely made many excellent investments.

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The more money you have, the better strategies you may find to increase your income. But let's be honest, not everyone qualifies for such a cheap mortgage rate; the national average is roughly 3%, but even at that rate, buying a home is still unnecessary if you can afford it. But first, let's be clear about this! Why are the rates for the super-wealthy lower than those for the rest of the nation? First off, when you are a billionaire, the bank can rest easy because nobody worries that you will default on your loan, and in the event that something does happen, you can easily sell a portion of your company to pay back your mortgage, eliminating the danger. Contrast that to the typical employee, who may fall ill and be unable to work or who may just lose his job.

When you pay your mortgage on time each month, you help to create and maintain a solid credit score, making it much simpler for you to borrow money from banks the next time you need it. In essence, you are creating a relationship of trust with the financial institutions. The situation might, however, also be reversed. Banks do this in order to build trust with wealthy clients so that, in the future, when their businesses require a loan from a bank, they turn to them rather than their rivals. It benefits both parties. However, these cheap mortgage rates are adjustable, so as I have mentioned, they could increase. Nobody needs to worry since, even if it no longer makes economic sense for these extremely wealthy individuals, they could easily pay off their mortgage.

Most people seem to confuse debt with being bad since we frequently borrow money for amusement that we can't afford and end up paying back much more than we originally borrowed. In reality, you become aware of how much of a problem your student debt is as soon as you graduate from college. And once you determine how long it will take you to pay off that debt, you immediately get the idea that debt is terrible, especially because you are unable to default on it.

It's difficult to play around with debt since you're ultimately taking a big risk, and even a small error could have terrible consequences. In fact, because we have to make all of these monthly payments, the majority of individuals can no longer even afford an unforeseen $500 cost. But that's what sets bad debt apart from good debt. Debt is leverage, which means that it may make you extremely rich if you know how to use it. Debt can ruin your life, render you homeless, and cripple your family if you are careless.

A superpower that can instantly make you wealthy is leverage. Let's take the scenario where you purchase a phone for $10,000 and then sell it for $11,000. Congratulations, you just made a $1,000 profit, but that's not much. However, if you use leverage, you would first visit a bank and borrow $990,000, then add your extra $10,000 to make a total of $1,000,000 in your account. You go to your supplier and buy 100 phones right now for $1,000,000, then you sell them to the market for $1,000,000 each. However, you continue to owe the bank money. As a result, you return the borrowed funds to them along with an additional $10,000 in interest. You are now left with $100,000. You have 90 thousand dollars of pure profit after deducting your own expenses of 10,000 dollars. When you don't have any money, you can make money in that way.

Both you and the bank received your fair share of the earnings. Of course, if you use this technique to its maximum and everyone on Wall Street engages in it without government regulation, it becomes a financial disaster, as it did in 2008. Do you recall when the housing market collapsed and the entire economy collapsed with it? Well, it's because the investment banks exploited leverage to increase their profit to the point that their plan backfired!

They started lending out mortgages to customers who did not exactly have the strongest credit and couldn't afford the monthly installments. They were forced into mortgage default as a result. The fact that housing prices had been growing for the past four decades and then abruptly began to decline was a nightmare for investors. We won't get into the specifics of the financial crisis of 2008, but it nonetheless played a significant role in how wealthy people make money today. Even though it's risky and you could end up losing everything, if you know what you're doing, you could become wealthy very quickly.

© 2022 Justice Ndlovu

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