How Someone in the Middle Class Can Build Wealth Like a Billionaire

What do Elon Musk, Archimedes, and I have in common?

We all knew how to use a simple concept that, I'd say, is one of the most powerful forces when it comes to making money. 

More powerful even than the miracle of compounding.

Doesn't matter if you're a multi-billion dollar corporation or someone just trying to earn a bit more per hour. 

Let me explain...

The other day I received a call from an old friend. She and her family are in a pretty good spot financially.

High income, refinanced mortgage with a low monthly payment, maxed out 401(k) contribution, little to no personal debt, lots of cash in a savings account...

Basically, if you've ever read a summary of any personal finance book, they're doing everything they're supposed to on paper. 

"What help can I possibly give you?" I asked. "Sounds like you have everything dialed in."

Well. 

She wanted to know what the next big step was.

"How do I kick my wealth building into high gear?" are the words she definitely didn't say, but we're going to pretend she did.

See, she had this large pile of cash that was big enough to be meaningful...

But not so big that she could just go and, say, instantly buy a rental property or become a private equity investor or what have you.

She seemed to feel that her wealth had hit a plateau. 

And so I suggested to her what I would suggest to anyone trying to "level up" their wealth building...

Ya gotta use leverage. 

The Dirtiest D-word in Personal Finance

Now, leverage is a bit of a dirty word in personal finance and Financial Independence/Retire Early circles because it's associated with that four-letter word: Debt. 

People hate debt because it can have an enslaving effect, where you spend your whole life working to the bone just to pay off the interest that's accumulated on, for example, a hospital bill or lien on your property or the cost of a nice necklace. 

But as I've said before, debt isn't good or bad. Debt is a tool that can be used for good or bad reasons. 

When it's used for good, debt creates leverage that can amplify or accelerate anything you're trying to do. 

It's called "leverage" because, with a lever, you can move objects and accomplish feats far beyond your individual strength. 

As Archimedes said, "Give me a place to stand [and a big ol' lever] and I can move the world." 

Leverage can be anything that helps you multiply your output. 

You can leverage your time by delegating or outsourcing tasks, for example.

You can leverage your skillset or new knowledge to get a pay raise.

You can leverage dividend payments to buy stock that then produce even more dividend payments (creating a compounding effect).

You can leverage a credit card company’s promotions, transferring the balance of one card to another to get a lower interest rate (saving money in the process). 

And, important for what I’m talking about here, you can leverage your assets to help you accumulate more assets…

And in so doing, multiply your wealth.

Sometimes, yes, that involves debt.

And it's here that I'm probably going to lose people...

"He's telling me to go INTO debt? Ok, this guy doesn't know what the hell he's talking about."

But I’m not talking about debt in the conventional sense. 

Let me give you an example...

How You Can Grow a Rental Real Estate Empire Overnight (And by “Overnight” I Mean Several Years)

Say you own your home and have been paying a mortgage... and you want to own a rental real estate property for the extra income.

To put some numbers to this (I’m going to keep it simple and ignore a lot of variables), let's say you own

> A $500,000 home with $200,000 remaining on the mortgage and a $2,000 monthly payment.

But let’s say you want to buy

> A $200,000 condo that you can rent for $1,500 per month. 

Now, if you have the cash, you can just buy the condo outright and earn (1500/200000=) 9% on your cash. 

OR you can refinance your mortgage…

Get a $400,000 loan…

Pay off your original mortgage…

And use the remaining money to pay for this second rental property.

Now you’re $400,000 in debt on your original home… 

But at current mortgage rates for a 30-year loan? You’re looking at a $1,900 monthly payment on that money. 

So if you get that $1,500 in rental income per month…

All of a sudden your monthly $2,000 in expenses drops to (1900-1500=) $400. 

You’re paying less…

But you own more: two properties!

The equity (the percent you own) on your original property is building back up, and if you pay off that loan aggressively your net worth just jumped from $300,000 to $700,000. 

Plus, now you have an asset that’s paying you $1,500 per month.  

And guess what? 

Say you want to get a third property. 

You can get a home equity loan on both your properties to buy a third. Then a fourth and fifth. 

So long as you’re not taking on too much debt or too much risk that someone won’t lend to you, you can repeat this process ad infinitum. 

This is Also the Secret of How Billionaires Keep Growing Their Wealth

If you’re a billionaire tech executive… 

You often have a choice. You can accept payment in the form of a salary (that you and the board of directors/shareholders decide upon) or you can accept payment in the form of stocks. 

Which would you pick?

I can tell you what Elon Musk does. 

Musk owns shares and stock options. 

This is an asset, much like the properties I listed in the previous example. 

If you have an asset, but you don’t want to sell it to get money (which would mean you’d have to pay taxes on it)... you can take a collateralized loan against that asset. 

That means you borrow money, and if you fail to pay the loan payments they will take away whatever you’re using as collateral. 

That means Musk gets to accumulate stock in one of the fastest growing companies in the world (for “free,” outside of his time and labor and, of course, dilution to the stock)...

And then he gets to take a loan out on this stock…

And live the life of a billionaire, funding his other projects, without ever having to incur a tax bill. 

In fact, some loan payments are deductible, which means that he gets to pay even less tax despite accumulating billions. 

This is why the average American’s tax rate is 13.3%...

But Elon Musk’s was 3.27%. 

Now, I’m not going to get into the debate about whether this is “fair” or not…

Nothing in life is fair. Certainly not tax laws. 

Instead…

Here’s How Someone in the Middle Class Can Build Wealth Like a Billionaire

When I wanted to buy my first home…

I was about $20,000 short in the cash I needed to make the down payment. 

But it didn’t matter, because I had accumulated money in my company’s 401(k) over the years. 

I called Fidelity, which manages my 401(k), asked for the loan, and had that cash sitting in my checking account within 3 days. 

I didn’t need to fill out any paperwork. I didn’t need to go through a long underwriting process. I didn’t even need to go too deep into the reason I wanted the loan.

I said “Gimme da money.” 

And Fidelity said, “Cash or check?”

I got to be my own bank, lending money to myself…

And I got it tax free.

But that’s not the coolest part. 

Yes, I had to pay back the loan, plus interest. 

But the loan payments and interest didn’t go to Fidelity… it all went right back into my 401(k).

Except for a small loan origination fee, taking this loan out caused my retirement savings to accelerate. 

Plus, I got to buy a house. 

I did this again, in 2021, when a friend of mine approached me with a private deal that required a large cash investment. 

I didn’t have that cash sitting around, and I thought that I could get better returns with this deal than in the stock market. 

So I called Fidelity again, asked for a loan against my 401(k) (I had already paid off my previous loan), and had the cash ready to go. 

Now, using the same asset as leverage (my 401(k)), I was able to buy a house AND equity in a private business. 

And anyone can do this. 

You can do the exact same thing with a life insurance policy, too. And many other assets. 

There’s nothing stopping you but yourself.

The Physical Laws of Wealth

You know the expression “the rich get richer”?

Well, what I’ve explained is one way it can happen.

Leverage.

With the safe and intelligent deployment of leverage, you can overcome an enormous amount of inertia that often stops people from accumulating money. 

I’m not trying to be classist here, either…

If you’re old or feel poor…

You probably have assets you can leverage and you don’t even realize it. 

That could be experience, could be time, could be a skillset you didn’t realize you could monetize. 

You don’t have to start BIG, with insane collateralized loans against your retirement plan (that you may or may not have). 

You can start small by picking up a gig that pays an extra $20 a week in your spare time.

Because once you start doing that…

Guess what? 

That money is going to snowball…

It’s going to grow and grow faster than you expect. 

And once it does, you’re going to have even more that you can leverage in the future…

Which will help you and your family keep getting wealthier. 

So take a moment to reflect on the assets you have…

And think about what you can leverage to achieve the things you want.