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March 15, 2010


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$600,000? That seems awfully high for an 'average American'. Even taking mortgages into account. Maybe it's an average across the board, taking in all Americans into account (so you have the super-wealthy paying interest on their McMansions skewing the data).

Heck, for me, it'd take me around 60 years to even earn $600,000 net, much less spend it in 'interest only'.

You're not going to catch me paying $600K in interest. :-) My guess is that the Forbes 400 have little to no personal debt, but I'm sure the corporations they control have taken on debt to grow.

I may never earn enough to pay $600k in interest, but if I earn enough to pay a quarter of that, $150k, and I can avoid it and put it in my own pocket, why not?

That sounds about right. At the end of our mortgage in about 28 years, we'll wind up have paid about 300k. My wife and I have had car loans, and we will probably have more in the future.

Gees-Louise! Just reading that makes me cringe and purposefully work my butt off to never pay that much in interest!

On the other hand, I don't think simply staying out of debt is the key to becoming wealthy. Probably some homeless/jobless people are out of debt. ;-)

I'm not sure there is just "one" key. I'd say there are many factors. Staying out of debt, increasing income, spending less than you earn, making your money work for you (investing), etc....all of it will lead to wealth, right?

$600,000! WOW that's just ridiculous. I'm curious as to what it is in countries such as the UK, Germany, Japan, Australia, and other developed nations.

There are plenty of couples in California today buying starter homes around $600K.
If you borrow $600K for 30 years at a fixed rate of 5.542%, the payment is $3,408/mo, the total cost is $1,226,880 (at my Credit Union).
Thus on the $600K jumbo loan you will have paid $626,880 in interest over 30 years.

I just checked for a street in Silicon Valley, not too far from where I lived in 1963. It has some homes in a crummy neighborhood that few readers of this blog would want to live. One recently sold on 10/06/09 for $599,000. It was 3br, 2ba, 1,108 sq.ft on a 5,200 sq.ft lot and was built in 1955. When it was built it would have sold for about $10K - $12K and they were snapped up by people with nothing down and a low interest rate GI loan. Starter homes are where the demand is the strongest, the best values are found in the very expensive homes that only a few can afford.

This post doesn't hit the real reason that rich people get rich. They don't do it by going debt free and saving their money. They get rich by taking a risk and riding an equity position most of the time fueled by debt. Whether it is real estate or a company, almost all of the Forbes list either utilized debt in their ventures that made them tons of money. Are you going to tell me that they didn't have office leases (a form of debt), equipment leases, lines of credit, or term loans. Are they going to say that they bought office buildings without using leverage. Maybe the Internet entrepreneurs or those that inherited it, but everyone else absolutely rode an equity position that was fueled by debt at one time. And those that didn't use debt likely used higher classes of stock (VC funding) that mimics debt in many ways.

In their personal lives, they may have shunned debt but there is virtually no way to get into the Forbes 400 if someone at some time didn't use debt. For a good article on how rich people make their money (not at the level of the Forbes 400), head to GoodFinancialCents and read

For the average Joe, shunning debt and living below your means will absolutely increase your net worth over time, but don't believe that's how the Fortune 400 got there.

While it may be true that real wealth is derived from businesses fueled by debt, there is a vast difference between business debt and personal debt.

Personal debt is primarily for consumption. It is rarely leveraged correctly, despite what people think they know about leverage.

Business debt is rarely used for consumption. It is most often utilized for production.

The reason is simple. Businesses don't have to live. Yes they must be sustained, but the primary objective of a business is to produce income. The primary objective of a person is to consume income.

Business debt is generally only granted if the debt can be repaid AND leveraged into growth. Growth of equity. Growth of income, sales,footprint, marketshare, etc.

Personal debt is granted only based on the ability to repay.

So the inherent difference is not only in the use but in the extension of the debt.

I am positive that no debt is the primary driver to personal wealth.

Income helps. make more than you spend helps (or spend less than you earn). But that mantra is arbitrary. Making $100K and spending 99K fits, but still shows issues.

Since debt service typically makes up a large percentage of the average individuals cash flow eliminating that debt service frees up typically more cash than any other option.

And, one who is debt free likely is determined and wise enough to save/invest the additional cash flow even a modest income would provide.

So forget what "companies" do, unless you own one. Don't borrow money, and you will likely end up financially independent at some point in time

I think remaining debt free is only part of the get rich solution.

I believe strong consistent investments are key to becoming wealthy. Also, debt can sometimes assist in the way to wealth, as it allows a person to leverage investments to make the most money.

Staying debt free isn't alone the solution, but it sure helps.

You know, Dave Ramsey is great for busting debt... but anything else he says beyond that, I tend to ignore.

The first point makes logical sense... on paper. Typically, if you want to get somewhere, one of the best people to learn from are those who are already there. However....

By that same logic, Robert Kiyosaki is an entirely qualified individual to be listening to, which I don't think he is. What about Paris Hilton? She's rich. She's already "there". How about the Bernie Madoffs that, so far, has evaded prosecution? The reality is, not everybody arrives at the same destination using the same, ideal method.

Instead, I find that the best way is to simply keep an open mind, listen from any and all sources that proves itself useful, and to constantly work at it, even on a microscopic scale. Sometimes, I find nuggets from even the strangest of places. My grandmother who is a Buddhist monk, for example. She has no need for material wealth, but you'd be amazed if you think she doesn't have any insights on frugality, simple living, and even managing personal finances. The trick isn't so much who you listen to, but how you listen.

As for the second point, well, I disagree with that as well. To simply stay debt-free is to basically maintain a net zero balance. Being debt-free is good, but that's not what's important.

What really matters is the velocity of your positive net cash flow. What's that? More specifically, it's how quickly you can bust debt, how quickly you can save up money, and how quickly you can build your retirement nest egg. So on and so forth.

Speed does not come without risks, so even that is not enough, but the point is, if you want to get somewhere, you have to be moving forward. And the faster you run, the faster you get there. Being debt-free only determines how much (or how little) the headwind is against you.

Personal debt free... people on that list dont work for someone else and often have loads of business debt- Other Peoples' Money. Besides, if you are on that list you have a net worth over $1b; most things in this world are obtainable with cash at that point.

Live Cheap is correct (although I think they take a lot less risk that people think)..."They get rich by taking a risk and riding an equity position most of the time fueled by debt."

I don't believe the claim that "75% of the Forbes 400 said the best way to build wealth is to become and stay debt-free." I don't have any research on hand, but I am sure that if you check the balance sheet of these people's companies, you will find plenty of debt on the books. They may be personally debt free by now, but that was not always the case. Taking some serious gambles which includes leveraging your money by taking on debt is probably the single most important factor that makes people rich. Let me give you two examples. John Paul DeJoria ($3.5 bln in 2008) says that "the only relationships that I left behind were creditors." That means that he had creditors at some point in his life.
Wilbur Ross ($1.8 bln in 2008) also says that the relationship with his bank changed as he became rich. "Instead of them lending to me at high rates, now I lend to them at low rates." He, too, has apparently gotten loans from his bank in the past.

Malcolm Gladwell wrote a great piece about the 'risks' some of the people on that list take to get on that list. "The Sure Thing" Jan 18, 2010... I tried to post a link to the article, but you have to be a subscriber to the New Yorker to read it. Worth reading if you get a chance.

"The truly successful businessman, in Villette and Vuillermot’s telling, is anything but a risk-taker. He is a predator, and predators seek to incur the least risk possible while hunting. Would we so revere risk-taking if we realized that the people who are supposedly taking bold risks in the cause of entrepreneurship are actually doing no such thing?"

For ordinary working people, such as myself, before I retired there are two ways to become wealthy and they are both, by necessity, slow.

One way that is possible even when you have a busy job that occupies most of your waking hours is to start accumulating rental properties. I have known many people that have done this successfully. The downside is managing the properties and dealing with tenants. There's a lot to learn if you are going to be successful, and if you are to keep your operating expenses down you have to be prepared to do as much of the work yourself rather than hiring a property management company to do it for you.

The second way is to build an investment portfolio and learn how to manage it yourself. Not everyone is capable of doing this. I think most people know instinctively whether or not they have the skills and interest necessary to do this, particularly Math skills. This is the avenue that I took to become wealthy. During my working life I was far too busy to give it the necessary time so I played it safe and just tried to keep saving everything I could every month. After retiring I devoted a huge amount of time educating myself in the technical analysis of stockmarket trends and became pretty good at it. Fortunately the advent of personal computers and the internet made it possible. The combination of that and having a fabulous stockmarket throughout the decade of the nineties was all it took. These days I am out of the stockmarket and producing a very steady 6 figure tax deferred and tax exempt return on my capital from CDs and Muni Bonds.

History never seems to repeat itself so what worked for me may or may not work for you, however acquiring rental properties has always worked in the past and will no doubt continue to work in the future, but it also requires lots of skill, expertise, and hard work and dealing with periods of frustration.

One statement made to me, decades ago, by a co-worker that I have never forgotten was "I can't afford to contribute to the company 401K". My reply, in disgust, was "You can't afford NOT to contribute to your 401K". This guy was the epitome of a Loser in my opinion, he also wasn't a good worker and was soon laid off.

I've had no debt for many years now. I save much more than the average person. I max out every tax beak the government allows. Like last year I put 22000 in my 403 and 6000 in my IRA. This was in a year that I took 4 months off work. I save and invest like crazy. ....but no... I am not rich. I am doing OK but as we all know the market has been rough the last 10 years or so. I have to conclude that being debt free for the last 20-25 years has been nice (no worries) but it has in no way made me rich.

Eugene Krabs and LiveCheap are exactly correct on the statement about debt and wealth.

Not having debt will keep you from getting into financial trouble but it won't make you rich without significant sources of income and then living far below those sources of income. In addition if your income is W2 based income you might get very well off financially, you might even get to a category that many people would consider rich (a couple million in net worth), but unless you are a CEO making very high 6 figures or 7 figures you will probably never rich great wealth and certainly you won't ever reach anything like any Forbes list (400; 4,000; or 400,000 - you aint getting on any of those lists with W2 income).

That kind of wealth comes from starting businesses, taking risk and using OPM (other people's money) as leverage to grow your business).

I also tend to agree with ctreit's comment. I don't believe the fortune 400 people really said no debt is how you build wealth. I think that is Dave Ramsey paraphrasing something and taking it out of context to fit his debt free agenda. You can call it lying or stretching the truth or just carelessness, I don't know. Sure I suspect they consider that good financial advice and probably live that way in their personal lives (why would you have personal debt if you are worth a billion dollars), but when it comes to growing wealth you think the #1 best piece of advice wealthy people have is don't borrow money. So don't borrow money and the result is that you will get wealthy? If a rich person gave me that advice for growing wealth it's the last time I would ask his opinion on anything. Probably the question was not exactly about growing wealth but about how the average person can reach financial security or some other thing like that. I would love to see the exact question that was asked. But no business person worth his salt would say that the best advice for growing wealth is no debt because everyone of them grew their wealth by strategically using debt.

Here are my suggestions on how to build wealth:

1) Save and invest money as early in your life as you can, using the power of compounding to help you. We have all, at some point or another, seen those charts that show the impact of saving money early vs later in life

2) Maintain your earning capacity. This means investing in and managing your career.

3) Spend less than you earn.

4) Minimize cash drains. Don't incur liabilities.

5) Don't make big mistakes. Pay attention to the macro environment (ie - don't buy real estate when prices have grown at a frenzied rate to the point of a bubble situation)

6) Stay healthy

7) Be generous in time and spirit...and in some cases, your money too. You don't have to give away all your time and money, and you certainly don't want to be foolish. But truly helping others in need can come back to help you in so many good ways.

Avoiding debt is great. But all by itself, it's not enough. People who avoid debt, almost by definition, save...because it's amost impossible to live exactly paycheck to paycheck....You either end up going in debt, or you end up a saver to avoid going in debt.

All that said, merely avoiding debt & saving regularly isn't likely to make you truly rich. It takes more than that. That's where Jean Chatzky's book "The Difference" comes in. I'm sure she'd say the people who avoid debt & save reguarly are likely going to hit "financially comfortable" status, which means they'll be better off than almost 70% of other Americans. That said, you're not going to get rich by merely avoiding debt & saving, let alone reach billionaire status.

Big fan of avoiding debt, saving, and investing. But, you don't become rich by doing those things. You become rich by owning a profitable business.

Being debt free is helpful, but I think it's secondary.

Wealth is built by first spending less than you earn. The second part is a combination of earning a bunch, luck, and long-term investments.

For instance, you can become very wealthy if you earn tons, spend much less, and save the rest. Or if you earn less, you can make up the difference through time (yummy compound interest) or investment returns (wisdom and luck...good combo).

My husband and I are sort of depending on the time, wisdom, and luck combo since he's looking forward to being a school librarian and I don't aspire to elevating my career...we will probably never earn a ton.

BUT, the key is spending less than you earn. Then you have the opportunity for wealth and debt freedom.

Also, $600,000 in interest seems nuts to me.

As it stands, we're "only" going to pay about $30,000 in mortgage interest altogether. The only other interest we've ever paid is on car loans - even that comes to less than $5,000 total.

We already have money set aside for future car purchases. We'll probably get a larger home in the future, but even if we pay double in interest, we are nowhere near $600,000...

My point is that for $600,000 to be the average, a bunch of people have to pay much more than that to make up for people like my husband and me. That's scary.

Ummm... if you always spent less than you make you would never be in debt right??? So, yes, if you don't have debt, the key is to keep on spending less than you make. BUT if you already OVERSPENT and got into debt (spending money you don't have), then you should do everything you can to get out of debt (which would require spending less than you make) then after that continue spending less than you make to STAY debt free.

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