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Comment by Night_Thastus | Hacker News Reader

For low-income people, debt is slavery.

For high-income people, debt is a powerful tool.

The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.

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I see this a lot and I think it hurts more than it helps. People read this as, “if I want to be rich, I need to take out debt.” And they almost always take on debt for the wrong reasons.

Agreed and you can use debt very safely if your net position is in credit. For one example I'm always amazed at how many people don't take advantage of the interest free period of credit cards. As long as you have enough savings put aside to cover the CC balance in full each month you're significantly better off doing all your spending on a credit card instead of a debit card.

> extreme caution.

See youtube channel 'CalebHammer' [0] (he does financial audits for those that are in financial trouble) of mistakes the regular people make. It can be quite painful to watch.

[0] https://www.youtube.com/@CalebHammer

> For high-income people, debt is a powerful tool.

How?

Not the original poster, but debt can allow you to shift transactions to periods that are most advantageous to you.

Here's an example. Let's say that you as a high wealth individual have some stock. The stock has a value of $10M but you can only realize that value through the sale of the stock.

If you sell the stock right now you have to sell it for the price the market will buy it at and you have to pay taxes on the profit, either income taxes if you've not had the stock for long or capital gains taxes if you've held it for the requisite period.

It is in your interest to optimize your sale so that you pay the least amount in taxes and get the best price per share. You'd love to be able to hold your stock until you can do that, but you need money now. In comes debt.

Someone will probably happily issue you some debt that you can use today as money. You can collateralize that debt with your $10M in paper value and get a nice interest rate.

So you take out $1M in debt and enjoy life and at the end you have to pay back, to keep the math easy, $1.1M. This debt cost you $100k but if by taking on that debt you can sell when the stock price is higher or convert income tax (37%) into capital gains (20%) then the $100k could easily buy you much more than $100k.

In our example if the stock price were the same but all you did was hold the asset long enough to convert it from short term to long term then instead of paying $10M * 37% = $3.7M in taxes, you'd pay $10M * 20% = $2M in taxes. That's a savings of $1.7M on your tax bill.

This is how people with assets can use debt as a tool.

The most important things financially are cash flow and coffer size. Being able to take on debt at advantageous times provides both of these things because it allows you to shift cash flow temporally and increase the money you have on hand at will. A rich person can translate portions of their future earnings into large amounts of capital on command, and this can come in the form of future anticipated earnings too (e.g., future anticipated rents or sales) while still being able to live on a day-to-day basis. Being able to control your current and future finances can also provide tax benefits if structured correctly.

Poor people can't do that - they need all of their cash now just to live, all the time.

https://v.redd.it/s0qwj8td9tyc1

> How?

Here's an example that could be achievable without needing to be a super high wealth individual, but does require being able to pay a few thousand dollars up front with little notice.

Let's say you get hit with a $3,500 medical bill. The hospital says they're willing to reduce it by 20% ($700) if you pay up front so now your bill is $2,800.

Now, let's say you rarely use credit cards and a major bank will give you $750 cash as a bonus if you spend $4,000 in 3 months. With the medical bill and regular spending you can hit that without making any "extra" purchases.

You could sign up for that card, immediately pay off the $2,800 to avoid paying any interest on the card and once you get the cashback bonus it's really like paying $2,050 instead of $3,500. Now you can take that $1,500 you saved, invest it at 5% for 15 years and with compounding interest you get back +$1,500 profit (minus taxes) which essentially means your medical bill was $500.

Of course this requires luck and timing around being able to do that with the card but even if you didn't have the card bonus you can get a guaranteed 20% return in 1 year by paying it off. The alternative is paying the full amount in smaller payments. Technically a lot of hospitals don't charge interest and give you reasonable plans to pay it off but most other places will charge you interest.

you are my group hahaha.

jokes apart, some great replies explain how.

I would phrase it more as a powerful tool if you are financially literate and have a predictable income (especially if it's predictable with confidence to a lender), something which is generally more true of high-income people. Debt (when appropriately priced) allows you access things that you would otherwise need to wait to afford, allowing saving money vs. renting said thing, or the time-value to you of the length of that wait (whether it's through directly financially benefitting from that thing, or from simply whatever utility you are getting from that thing, or both, like buying a more expensive car which saves you money on fuel and maintenance as well as just being nicer to drive). It's dangerous when your income is not predictable (because it means that debt is more expensive for you as well as more personal risk), or if you are forced into debt for necessities that are beyond your means, or if you are financially illiterate, all of which can mean you take on debt beyond your means, which quickly becomes exploitative.

(That latter part can happen even with very high incomes. It's not unheard of for e.g. professional sports players or celebrity actors making millions to take on way too much debt and ruin themselves, especially because their high income can disappear quickly, e.g. due to an injury)

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