What wealthy people do with debt that others don’t
Rich people treat debt differently than the rest of the population, and it’s worth knowing what they do with their mortgages, credit cards and investment loans.
EVERYBODY wants to be rich, but nobody likes feeling crushed by a huge pile of debt.
Most wealthy people don’t mind owing money, and plenty of it, and don’t seem stressed by giant interest payments.
The rich treat debt differently than those who are not as well-heeled, and it’s a good idea to know some of their secrets and strategies.
THEY’RE NOT SCARED OF BIG NUMBERS
If you’re freaked out by a $5000 credit card debt, reading further may be harmful to your health.
Rich people will often owe millions of bucks to banks and other lenders, but it’s mostly secured against quality assets or investments.
INVESTING: How to turn five bucks a day into $50,000
And their loans are not usually a huge proportion of the asset. Adrian Frinsdorf, director of wealth advisory at William Buck, says wealthy people often cap their borrowing at 50 per cent of an asset’s value.
“It’s not uncommon for other less wealthy people to consider 80 to 100 per cent loans,” he says.
THEY USE GOOD DEBT, NOT BAD
The rich only pay interest on debt that’s used to make them more money, typically investment loans for property or other investments, or business loans.
That debt is almost always tax deductible, unlike personal debt such as credit cards or personal loans that come with high interest rates and no tax deductions.
THEY DON’T PAY CREDIT CARD INTEREST …
Credit card interest rates average around 20 per cent, and rich people understand that no investment is going to deliver that sort of investment return every year.
So rule number one is to make sure credit card debts are cleared before the end of their interest free period, usually up to 55 days.
… BUT THEY LIKE CREDIT CARDS
Many wealthy people will have a collection of credit cards — one to earn flight rewards points, one for their business or family, perhaps a low-rate card to use at places that don’t accept their Amex card.
“Many wealthy investors pay for everything via credit card and then have that repaid in 45 days,” Mr Frinsdorf says.
They make their credit cards work hard for them by maximising the points-earning potential with frequent flyer schemes and using special offers such as free travel insurance.
THEY’RE PREPARED TO HAGGLE
When it comes to the interest rate you pay, every fraction of a percentage point reduction is extra money in your pocket.
Rich people check that their lender gives them a good deal. While a quarter of a percentage point of interest cut on a $250,000 loan saves about $625 a year in interest, for a $2 million property portfolio that saving is $5000.
NEGATIVE GEARING IS NOT THEIR END GAME
Australia has more than two million rental property investors and many are attracted to negative gearing, which gives them a tax deduction when their expenses such as interest, council rates and maintenance costs exceed their rental income.
Rich people view positively-geared properties as better than negative. They’re financially ahead after paying tax on the excess income, because negative gearing never pays back the full expense.