How Rich People Use Debt (And Why They're Smarter About It Than the Rest of Us!)

Talk to a person saddled by overwhelming debt, and debt is a true four-letter word. The zealots among them dream of a glorious debt-free day when there will be neither plastic nor student loans nor even mortgages to weigh them down.

Debt can ruin you, no doubt about it. But not everybody thinks that debt is a thing to be avoided.

Some writer once said, "The rich are different." I don't know if that's true, but the rich think differently about debt. I'm not talking the socialite, easy-money, or ditzy celebrity "rich." I'm talking about people who amassed their own fortunes, sometimes against formidable odds. Those guys think differently about a lot of things, including debt.

For smart money managers, debt can be a tool. It's a way to leverage your money by letting a little money buy you a lot of advantage. (Here's an example. You buy a house when you think you can get a great deal. Only you don't sink your life savings into the house, you put a little down, take out a mortgage, and pay on the debt until you can re-sell the house at a tidy profit. That's leveraging your money.)

Debt can also be a way to finance a business or investment without tying up your own money. Most smart business people recommend that you don't sink your life savings into your own business, but rather let some venture capitalists subsidize you. That's using debt in a smart way (well, it's smart if you have a plan).

And that's the main way that rich debt differs from the debt that drowns poor people. Rich people have a plan.

To use debt wisely, you should know why you're getting in debt, understand the risks involved, and have a clear and concise exit strategy. A rich person who goes into debt not only knows how he or she is getting out, he or she also can tell you when (approximately) it will happen.

Although rich people take risks, they are actually risk averse. They only appear to take risks because their different way of thinking means they behave different from most of the rest of us (the non-rich). Still, they never get into debt without a plan to get out and a backup plan behind that. They may even have a third "May Day!" plan which is a plan to deal with a worst-case scenario.

Poor people tend to get into debt casually, without thinking. They have (at most) only a vague plan of how they're going to get out of debt ("Someday I'll be making more money than I am now and I can pay it off then.") They have no backup plan and a worst-case scenario has never even entered their minds.

What's more, rich people have debt with a purpose. They may enter into debt--often and for large amounts--but it's always for a reason and that reason is to boost their net worth. Poor people also get into debt but it's often for no real purpose other than to feel better or keep up with the neighbors or not miss out on a vacation.