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I think you are wrong about the wealthy using leverage instead of cash. The two individuals I references were not over-leveraged at the time they borrowed. It was only after they had a crimp in their cash flow that the house of cards folded in on itself. That’s the point - today’s smart debt is tomorrows disaster.
I pointed out two “wealthy” individuals that blew themselves up with leverage. The truly wealthy use cash and high end (eg Goldman Sachs and the like) investment managers, the “sort of” wealthy rely on retail financial planners and leverage. What you are referencing is the average pedestrian wealthy .. lets say net worth under $5MM. You can’t even get an invite to talk to GS investment managers with less than $5MM in investable assets - ask me how I know. Those average pedestrian “wealthy” folks finance because they listen to retail financial planners and the like and think debt is the way to riches. They don’t understand the downside of leverage for their personal possessions.
Now the wealthy may, and typically do, finance their business ventures. For example, degt to purchase business assets or trading on margin. What they don’t do is use leverage for their personal properties. There is a huge difference.
Another example. Sold a very large tract of prime water front property, main home, guest home, multiple barns, shop, pastures, setup for horses. I owned the entire rural residential subdivision - all the lots. Beautiful family retreat. I owned it .. no leverage. Had a cash buyer that was part of a billionaire family in Chicago who mpurchased it. You guessed it .. cash.
Another anecdotal story of someone that doesn’t know how to use chainsaws doesn’t invalidate the tool.
The beauty of knowing the difference between good debt and bad debt is you can increase your wealth whether your income is $50k or $50MM.
So it’s not a necessity. No argument there. But it’s mathematically superior to use good debt; this is an undeniable fact.
Another anecdotal story of someone that doesn’t know how to use chainsaws doesn’t invalidate the tool.
The beauty of knowing the difference between good debt and bad debt is you can increase your wealth whether your income is $50k or $50MM.
So it’s not a necessity. No argument there. But it’s mathematically superior to use good debt; this is an undeniable fact.
The point you fail to acknowledge relates back to your original premise. Your premise, simply stated, is that the wealthy use debt instead of cash for personal property purchases. That statement is false in my experience.
I would posit that a billionaire family from Chicago likely knows how to use debt property. Yet, with the ability to borrow as much as they want, they still used cash for the purchase I referenced. Likely because the value of the property was a rounding error, to use a tired phrase, in relation to their net worth.
My statement, in so many words, is that the truly wealthy do not use debt to leverage personal purchases. Likely because, as a percentage of net worth, their personal purchases are small. Also likely, they know the difference between good debt service and bad debt service. Financing personal purchases, toys, personal real estate is bad debt service.
The point you fail to acknowledge relates back to your original premise. Your premise, simply stated, is that the wealthy use debt instead of cash for personal property purchases. That statement is false in my experience.
I would posit that a billionaire family from Chicago likely knows how to use debt property. Yet, with the ability to borrow as much as they want, they still used cash for the purchase I referenced. Likely because the value of the property was a rounding error, to use a tired phrase, in relation to their net worth.
My statement, in so many words, is that the truly wealthy do not use debt to leverage personal purchases. Likely because, as a percentage of net worth, their personal purchases are small. Also likely, they know the difference between good debt service and bad debt service. Financing personal purchases, toys, personal real estate is bad debt service.
I understand what you’re saying, but I don’t believe you’re following what I’m saying. The plural of anecdote isn’t evidence. Also, I never suggested billionaires should finance toys, that’s absurd.
Here, let’s make it clear with numbers. You seem to relate to personal residences, so let’s go with that. Give me a fictitious person at a typical income quintile and let’s see if they’re financially better off financing or buying their property outright.
I understand what you’re saying, but I don’t believe you’re following what I’m saying. The plural of anecdote isn’t evidence. Also, I never suggested billionaires should finance toys, that’s absurd.
Here, let’s make it clear with numbers. You seem to relate to personal residences, so let’s go with that. Give me a fictitious person at a typical income quintile and let’s see if they’re financially better off financing or buying their property outright.
Anecdotal evidence is evidence whether one wants to accept it or not. You suggested the wealthy do finance - where is your cutoff of wealthy - both high and low - that do finance?
As for personal residences I can’t answer your question or give you an example that will pass muster. The wealthy I know don’t measure themselves in terms of income or income quintile to use your parlance. Income is secondary to increases in net worth. That is the difference between cash flow folks and net worth folks - high net worth folks have a much longer horizon sometimes spanning generations. Cash flow folks - well they are just that - cash flow folks which denotes a monthly number needed for debt service. It really is a paradigm shift in thinking from where you are.
Let me give you another anecdotal point of reference. I have a business friend who’s son plays in the NFL - $16MM a year contract. He recently purchased a $1.1MM home. Did he finance? Quick answer - No, that home purchase was less than a months income. Your error is you are not familiar with the truly wealthy.
Do you think a lot of the satisfaction from being free of cheap debt is more psychological rather than logical?
Yes, And that's OK. I retired 5 years ago and I've got $75 K balance on my mortgage that I could easily repay- but choose not to. It's at 3% and I can still itemize so there's a bit of a tax benefit, too. Others want no debt in retirement. To each their own.
Yes, And that's OK. I retired 5 years ago and I've got $75 K balance on my mortgage that I could easily repay- but choose not to. It's at 3% and I can still itemize so there's a bit of a tax benefit, too. Others want no debt in retirement. To each their own.
Never pay money to itemize. For conversation purposes, lets assume $10K in interest and you itemize which saves you $2500 (assuming 25% marginal rate). How is paying $10K to save $2500 a good deal? This is the pablum the mortgage company feeds unsophisticated borrowers!
Anecdotal evidence is evidence whether one wants to accept it or not. You suggested the wealthy do finance - where is your cutoff of wealthy - both high and low - that do finance?
As for personal residences I can’t answer your question or give you an example that will pass muster. The wealthy I know don’t measure themselves in terms of income or income quintile to use your parlance. Income is secondary to increases in net worth. That is the difference between cash flow folks and net worth folks - high net worth folks have a much longer horizon sometimes spanning generations. Cash flow folks - well they are just that - cash flow folks which denotes a monthly number needed for debt service. It really is a paradigm shift in thinking from where you are.
Let me give you another anecdotal point of reference. I have a business friend who’s son plays in the NFL - $16MM a year contract. He recently purchased a $1.1MM home. Did he finance? Quick answer - No, that home purchase was less than a months income. Your error is you are not familiar with the truly wealthy.
I can relate. If a person of "ordinary" means like me tried to purchase a $3.00 snack with a credit card and the card got declined, I'd probably pay cash on the spot. What I would NOT do is call the bank and waste 30 minutes being on hold in order to borrow $3.00 interest free for a month. My time is worth more than that.
For a billionaire buying a $1 million house or a $100,000 car, that's probably how they feel about bothering with loan paperwork - their time is too valuable to waste it on leveraging what is to them a tiny amount of money!
Anecdotal evidence is evidence whether one wants to accept it or not. You suggested the wealthy do finance - where is your cutoff of wealthy - both high and low - that do finance?
As for personal residences I can’t answer your question or give you an example that will pass muster. The wealthy I know don’t measure themselves in terms of income or income quintile to use your parlance. Income is secondary to increases in net worth. That is the difference between cash flow folks and net worth folks - high net worth folks have a much longer horizon sometimes spanning generations. Cash flow folks - well they are just that - cash flow folks which denotes a monthly number needed for debt service. It really is a paradigm shift in thinking from where you are.
Let me give you another anecdotal point of reference. I have a business friend who’s son plays in the NFL - $16MM a year contract. He recently purchased a $1.1MM home. Did he finance? Quick answer - No, that home purchase was less than a months income. Your error is you are not familiar with the truly wealthy.
No, the plural of anecdote isn’t evidence. That’s anti-vaxxer logic. “Look at this one case where someone died from a vaccine reaction, that means they’re dangerous.” You are applying an exception as the rule, which isn’t logical.
In every one of your examples they would have grown their wealth more by using debt properly. We could go back and forth with how much, but it’ll always be more.
I’m glad your latest example was an NFL player too. Their financial distress/bankruptcy rate is 80% within the first two years of retirement. You couldn’t have picked a better example of poor financial discipline, except for maybe lottery winners.
Good debt will benefit 100% of people that can use it properly, any quintile. I suspect that’s the reason you didn’t pick one, the mathematics are clear.
Just because some people make poor financial choices doesn’t invalidate the fact that good debt grows wealth faster than paying in cash. If the opposite were true, you would have shared your math by now.
I can relate. If a person of "ordinary" means like me tried to purchase a $3.00 snack with a credit card and the card got declined, I'd probably pay cash on the spot. What I would NOT do is call the bank and waste 30 minutes being on hold in order to borrow $3.00 interest free for a month. My time is worth more than that.
For a billionaire buying a $1 million house or a $100,000 car, that's probably how they feel about bothering with loan paperwork - their time is too valuable to waste it on leveraging what is to them a tiny amount of money!
Sure, they just leverage debt differently. Does anyone have any examples of billionaires that didn’t use debt to increase their wealth?
No, the plural of anecdote isn’t evidence. That’s anti-vaxxer logic. “Look at this one case where someone died from a vaccine reaction, that means they’re dangerous.” You are applying an exception as the rule, which isn’t logical.
In every one of your examples they would have grown their wealth more by using debt properly. We could go back and forth with how much, but it’ll always be more.
I’m glad your latest example was an NFL player too. Their financial distress/bankruptcy rate is 80% within the first two years of retirement. You couldn’t have picked a better example of poor financial discipline, except for maybe lottery winners.
Good debt will benefit 100% of people that can use it properly, any quintile. I suspect that’s the reason you didn’t pick one, the mathematics are clear.
Just because some people make poor financial choices doesn’t invalidate the fact that good debt grows wealth faster than paying in cash. If the opposite were true, you would have shared your math by now.
Obviously you don’t grasp the paradigm shift I mentioned earlier and you failed to answer my question regarding your cutoff - high and low - for wealthy individuals that use leverage for personal property. As for anti-Vaxer logic - no that is not quite the case her.
Could you please provide a third party reference for your statement bolded above? If you can quote a specific ratio of distress/bankruptcy surely you can point to a independent source for that data point?
Growing wealth will not always be more using debt. Some years it might be more, some years it might be less. I usually shy away from such blanket statement because there are always exceptions that make me look foolish. The point that you seem to be unable to grasp is that the truly wealthy don’t measure wealth increases in terms of a year or years, they have a much longer time horizon. Much is the difference between cash flow guys and net worth guys.
My point, should you decide to accept it is, the truly wealthy, as a rule, do not finance personal possession which was the original statement you made. I have presented three specific examples to support my hypothesis, you have presented nothing other than your “feelings” to support yours. I think what is clear is that you have a feeble connection with truly wealthy individuals while I, on the other hand, have direct real life experience with truly wealthy individuals and the completely different way they think.
I think the nut of the problem is that your definition of wealthy and my definition of wealthy is significantly different. Wealthy, to me, starts off at $10MM and above networth. Any thing less is simply well off and those folks do use debt as leverage - good or bad.
Last edited by Spokaneinvestor; 10-06-2019 at 07:23 PM..
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