Transcription
Living on loans is supposed to ruin your life, right? Credit cards trap you. Debt keeps you stressed. Loans are how people fall behind. That is unless you're rich. Then living on loans becomes the smartest financial move you could make. The richest people on Earth pay for their lives entirely with borrowed money. And somehow that makes them safer, richer, and more powerful over time. In this video, we'll explain how that happens and why the exact same strategy destroys everyone else. Welcome to Alux.
First up, let's talk about the illusion of debt. Okay, at the core of this problem sits how debt works mechanically for different people. For most, debt means monthly payments and interest piling up for things that either lose value over time or just consume themselves. things like a car that's worth less every year, a house that locks up cash, or credit cards that compound against you. Now, the worst part is how this debt is paid. You see, for these people, debt is serviced with after tax income. Essentially, you earn money, you pay income tax on said money, and what's left over goes to the bank plus interest. So, you're paying taxes and interest rates at the same time. Every month your paycheck comes in and part of it immediately disappears. From the outside it looks like debt is the problem. But that's the illusion. Debt isn't inherently bad. It only becomes bad when there is no leverage. For most people, debt is tied to unstable income, little to no collateral, assets that don't grow, and mandatory monthly payments. Miss enough payments and the bank takes the asset back. This is why debt breaks regular people. They borrow too much compared to what they own. In most cases, it's because they have no other option. So, from day one, the balance is backwards. Their debt is large, their assets are small, and income is the only thing holding everything together. When you borrow this way, your bank becomes your landlord. You don't own anything. You're just renting it from the bank until the final payment clears. This is why consumer debt carries high interest rates. If your job stops, the payments stop. If the payments stop, the loan breaks. So, the bank prices that risk in advance with high interest, strict terms, and no flexibility.
Now, both the rich and everybody else borrow cash to pay for what they need. The only difference is the rich borrow less than what they already own. And this is where the story flips. To a bank, the most important question is how easy is it to get the borrowed money back? When you own assets that are large, stable, and appreciating, borrowing stops being a risky decision and becomes a liquidity decision. The bank isn't lending against your job. It's lending against your balance sheet. This is the key difference. Okay? A regular borrower says, "I need money to buy something." A wealthy borrower says, "I already own something valuable. I want some temporary access to cash." And that changes the entire relationship. Instead of evaluating income, banks look at collateral value, volatility, loan to value ratios, downside protection. If you own a $20 million asset and borrow $5 million against it, the bank isn't worried. Even if things go wrong, they're covered. That's why interest rates drop. That's why terms loosen. That's why flexibility appears. Because the loan isn't what makes you risky. not having assets does. And this is how the rich can get way better deals from the banks.
But this answers only half the question. Here's the part that sounds impossible the first time you hear it. The rich don't take loans with the intention of paying them back, and that is how they actually get to live on loans for their entire lives. Now, before we break down how this works in depth, I just want to take a moment to remind you that inside the Alux app, we go deep on all kinds of topics designed to help you level up your game to grow wealth, to secure wealth, build confidence, start a business, even have healthier, more stable relationships. The app is basically an ecosystem for entrepreneurs and high- net worth individuals, especially with the launch of the Alux Network, our latest addition to the app. It's a vetted community of your peers, people trying to achieve similar goals to you that you can talk, shop with, get insights from, compare notes, and offer support. And if you download the app at alux.com/app and scan this QR code, you'll get 25% off your annual membership, which is a taxdeductible expense, by the way. All right, with all that said, let's get back to it.
How the rich actually live on loans. So, the first step in making this work is building assets that banks trust more than people. Before any loan is taken, the groundwork is already done. And the assets the wealthy own share a few key traits. They appreciate over time. They're relatively stable. They're easy to value. And they're easy to liquidate if needed. So, things like public stocks, income producing real estate, and private businesses with predictable cash flow. From a bank's point of view, these assets are safer than your job. A job could disappear overnight. A diversified portfolio or a prime property rarely goes to zero.
Step two, they borrow a small amount relative to what they own. Now, this part is important because this is what allows them to get better deals. If you own $10 million in assets, you can't just go to a bank and ask for 100 on the premise of trust me, bro. But you could get $1 to5 million if you own $50 million in assets. This is called a low loan to value ratio. So in other words, the bank is more than happy to give you the money and at a low rate because you are extremely low risk. Technically speaking, you could pay back the loan anytime you want, but you don't ever. And this is where step three comes in. Okay, the loan is structured for flexibility, not payoff. And there are two ways that loans work. Most people get income backed loans. So the bank lends against your paycheck. So you are forced to pay back principal every month. In other words, you pay what you borrowed plus interest every month until everything is paid off completely. And there's no other way around it. The wealthy get asset backed loans. The bank lends against what they already own. And when the loan is backed by assets, it's often structured so you only need to pay back the interest. Yes, just the interest. You heard that right.
So, here's how that works. Simplified. Imagine you own real estate, stocks, and land worth $50 million combined. You walk into a private bank and ask for an asset backed loan with the intent to live off that liquidity. Why would you do that? Well, because loans are not income and therefore not taxable. The bank agrees to lend you $10 million for 10 years at 3% interest. That's a 20% loan to value ratio. For a private bank, anything in the 10 to 25% range is considered ultra safe. You sign the papers and $10 million is wired into your account. That money is not taxed. It's borrowed, not earned. Your only mandatory payment is the interest, $300,000 per year. On paper, the loan matures in 10 years, and we'll get to what happens then. But in the meantime, you decide how fast to use that money. You might pace yourself and treat it like $700,000 a year in spending power for a decade, and that pacing is your choice. But fast forward 10 years, you've paid the bank $3 million in interest. The principal is still $10 million. So, what happens next? Well, you've got many options, but two of them are the most common.
Option one, you refinance. You take a new $10 million loan to close the original one and continue paying interest. Why would you do that? Well, because the alternative is selling assets. To raise $10 million net, you might need to sell $20 million worth of assets, trigger millions in taxes, and permanently give up your future upside. Why pay $8 million in taxes today when you could pay $300,000 a year and let inflation reduce the real burden over time?
Option two is you refinance and expand. So over the course of those 10 years, your assets may have grown. If that $50 million portfolio is now worth $100 million, the bank could lend you $20 million at the same 20% loan to value ratio. The old loan is closed. you get additional liquidity and the process repeats. This is the option that most wealthy borrowers choose.
Now, we're hearing you ask, "What if the assets don't grow?" And here's the reality, okay? These loans are backed by productive, diversified assets, real estate, businesses, land, and broad stock markets, not by Pokemon cards and limited edition Jordans. All right. Historically, across the long time horizons, these assets grow. And even when they fluctuate, the low loan to value ratio provides a massive buffer. That's why you borrowed a small fraction compared to what you already own in assets. And this is why asset backed loan failures are rare at the individual level. When they do happen, they're usually a part of global leverage events and they make international news. Banks aren't stupid, okay? They monitor collateral continuously and adjust long before things break. That's the entire point of borrowing conservatively. And this is how the rich live off loans.
And then comes the final step, literally. The borrower dies. You borrowed money your whole life. And now it's time to find out which religion was right. What happens to your loans and your assets? Well, first off, let's talk assets. As long as you didn't sell them while you were alive, the tax system treats them as unrealized gains. And at death, something pretty remarkable happens. The value of those assets resets. If you bought something for $1 million and it's worth $10 million when you die, the tax system now pretends it was always worth $10 million. In other words, say you bought stocks 50 years ago for $1 million and they're now worth 10 million. If you were to sell them right before you died, you would have to pay taxes on $9 million in profit. But if you don't sell them and they get inherited by your family and they sell them after you die, they don't have to pay anything in taxes because no profit was made. 10 million was inherited, 10 million was sold.
As for loans, that $1 million loan you took out in 1994 can now be paid by your family by selling $1 million worth of assets now without having to pay taxes on that sale. And they go ahead and do the same thing that you did. And the whole process repeats for decades. and entire generations. This system of asset backed borrowing has existed for centuries in different forms and it'll continue to exist as long as assets exist, ownership matters, and money needs somewhere safe to sit.
All right, Alexer, that's all for today. We'll see you back here next time. Until then, take care, my friend.