How the rich use debt to make money

Many people think of debt as a burden. Credit cards, personal loans and mortgages carry risk.
But the rich view debt differently. For them debt is not just a tool.
They use leverage to scale their investments and build long-term wealth.

Here’s how they use debt to build wealth and how you can use the same principles without getting into financial trouble.

Getting into the right kind of debt

Wealthy people don’t treat every type of debt the same.
There are bad debts, like high-interest credit card payments, or financing a new car which loses thousands the moment you leave the dealership.
They get into debt that creates significantly higher returns than the cost of borrowing.

For example:

• a mortgage to buy rental property that generates monthly cash-flow

• borrowing to invest in your business that will produce profits

• using credit lines to finance deals with predictable returns

Smart use of leverage

Let’s break down these different types of leverage:

1. Mortgage leverage
   Using mortgages to buy real estate means putting down only part of the cost of the property while generating monthly income that covers payments and provides you with an income.
   The property slowly appreciates in value, and over time you build equity in the property.

2. Business financing
   Taking loans, credit lines or issuing debt can let a business grow faster than using only cash flow.
   Building new products, hiring employees, opening new locations will help increase your profits, despite the higher business cost.

3. Investing on margin / using borrowed capital
   In the stock market, hedge funds and wealthy investors sometimes borrow or use derivatives to amplify gains. They also hedge risk.
   It’s interesting to learn about, but most of you will not be using this strategy in the near future.

4. Tax advantages
   Interest paid on certain debts can be deductible in many countries. Depreciation and other debt-related deductions reduce taxable income, increasing net returns.

5. Arbitrage of interest rates
   If you can borrow at a low rate and invest in something with a higher return, the difference becomes profit.
   Wealthy people shop for cheap debt. They use good credit, negotiate terms, and launch projects that earn more than the cost of money.

Borrowing against assets
Many wealthy people don’t sell their stocks, real estate, or businesses to fund their lifestyle.
Instead, they borrow against these assets at very low interest rates. For example, they might take out a line of credit using property or shares in a business as collateral.
This way they keep the asset growing, often tax-deferred, while using cheap borrowed money to pay for living expenses, investments, or new opportunities.
It’s one reason billionaires high-quality lives without having to sell their investments: they live off borrowed funds while their wealth grows.

Risk management is everything

Using leverage does have downside. Almost everyone profits when the economy is hot, but you must be prepared for bad times as well.
Your profits equal the wins minus the losses. Don’t get fixated on making as much money as possible one year, only to get financially wrecked the next year.
That’s why the rich are disciplined:

• They always have liquidity stashed away - unexpected interest rate rises, vacancies in real estate, underperforming business all hurt your bottom line.
  Having money ready for a rainy day helps prevent financial ruin.

• They spread risk – they rarely risk everything in one investment.

• They know the cost – they have a clear overview of their investments, to prevent costly surprises.
  

How you can use debt to you advantage

You don’t need millions in the bank to invest using debt. But you do need discipline, good judgment, and patience.

Here’s how you can apply these ideas:

1. Start with your credit profile
   Make sure you have good credit, low existing debt, and reliable income. That gives access to better rates and safer borrowing.

2. Use mortgages wisely
   If you’re buying a home, consider buying a rental property that at least covers its mortgage with rent. Over time, you build equity in an asset that rises in value.

3. Small business or side venture borrowing
   Use a low-interest loan or business credit line to grow your business: buy equipment, invest in marketing, or develop a product.
   Only borrow money if you have a detailed plan for success. Don’t borrow because the cool kids do it.

4. Don’t use debt to chase status
   Avoid borrowing for depreciating things: fancy cars, designer clothes, luxury gadgets. Those costs rarely generate returns.

5. Choose low interest, inflation friendly debt
   Fixed low-rate debt in inflationary environments can work well—your debt stays constant while prices, rents, or revenues rise. Always ensure after all costs your net return is positive.

6. Always have exit plans
   If interest rates rise, if business slows, if you can’t make payments—what will you do? Always plan for downside. It will come.

Conclusion

The rich use debt as leverage.
They borrow when the returns justify the risk. They scale their investment portfolio using other people’s money pay back their debt, and keep the difference.
They manage risk, so their wealth grows in good times, and is protected in bad times.

You can do the same on a smaller scale, with fewer risks by investing in a rental property, scaling your business or selling action to move up stakes in poker

At High Stakes Finance, I help clients make the right financial decisions, so they build wealth and keep it.
Let me help you become successful today.