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Debt, used properly, makes you wealthy. Every billionaire you know has debt because of the advantages.
I grew up middle class. To afford my prestigeous university, I took out debt (before grant only financial aid). The value of my education allowed me to earn a higher salary to pay it off in two years. I kept earning that salary and more after the debt was paid. It had a high present value.
I bought my latest house four years ago. Mortgage rates were so low I decided to finance part of it at 2% even though I had the cash. I now earn 4.5% in money markets. After taxes, I earn 0.72% every year not to pay off my mortgage. With $350,000 remaining, this is an extra $2,500/year right now.
I shop with credit cards that give me 2-5% back on purchases. I pay off my balance every month and have never paid one penny in interest or penalties in over a decade. My credit cards therefore pay ~$1,500/year tax free.
Larry Ellison likes controlling Oracle and being a billionaire. Rather than selling stock of Oracle to fund his lifestyle, he instead borrows against the value of the stock. As Oracle appreciated, he got to keep the gains he doesn't trigger capital gains taxes.
Most Americans do live paycheck to paycheck. They live at the ragged edge of their means and remain ignorant of finance. However, this is a global phenomenon. The difference is that much of the United States tax code is set up to benefit the wealthy. Adopt their habits and your wealth starts to snowball.
I don't really have anything to add as this is pretty much all spot on to how the wealthy live, but on this one I'd like to point out that you're not actually making money - you're just taking back part of the money that you already paid. That money isn't paid by the credit card companies, they'd never be dumb enough to leave money on the table like that. They pay it through increased transaction fees for the businesses, who eat the extra cost through higher prices. There are states that do something similar with their recycling programs. They give you 5 cents per bottle you recycle at the center, but you paid a 5 cent bottle deposit when you bought them at the store. You're not making any money, or even making back some of what you paid the store. You're just getting your deposit back.
Maybe you somehow reduce your taxes by cycling that money through a cash back program? I'm not well versed on finances, so I won't even try to theorize on that, but it certainly isn't free money or something.
I never really understood this. He still has to pay the loan, and he isn’t doing that with his symbolic $1/year salary. What part am I missing?
Debt interest below investment yield means infinite money.
You're missing the taxes they aren't paying on the yield of the investment. That's only taxed when sold. So if you borrow against investments tied up in the market then it never triggers the tax.
Theoretically their estate would get taxed on the value resulting in a nice cascade of tax triggers but they're doing away with that asap.
You need to pay that loan with cash, right? I get that your assets secure the loan, but without another source of cash, how you pay back the loan and not sell your assets?
Just keep borrowing and pay with that. Debt interest lower than yield.
Can you provide an example? I'm not sure I get how that works out in their favor. In my view, paying debt with more debt is a terrible mistake and will get you in financial trouble. But I get that they have far more assets than I do. I just don't quite see where it doesn't go wrong.
Do they not have to pay the principle?
I borrow $1000, assuring you I can pay you back because I have $5000 worth of stock.
A few years later, I borrow $5000, assuring you I can pay you back because I have $10000 worth of stock (it’s not more stock, it’s just worth more now). I use that $5000 to pay off the $1000 debt plus interest, and then have some left over.
Few years later, I borrow $10000, assuring you I can pay you back because I have $50,000 worth of stock. I use that $10000 to pay off the $5000 debt plus interest and then have some leftover.
Repeat as necessary. The bank does eventually get their money (when you die or are for some reason forced to sell, paying off the debt with cash rather than promises). To the bank this is an investment. To you, it’s a way to get cash without having to actually sell your stocks, avoiding taxes, and letting your value continue to skyrocket.