Even Wealthy People Have Debt So Why Aren't We Richer?

Wealthy people borrow money all the time. So why aren't we all rich?

Since Donald Trump became President people have not forgotten that he is a failure as a business man. In 2016 NPR ran a story explaining how Donald Trump's bad business decisions cost himself almost $1 billion. Investors in his properties lost about $1 billion, too. This is the man that middle America chose to be its next President. Since that time Trump has created the largest annual budget deficit in history, run up the largest national debt ($22 trillion and counting) in history, and he initiated trade wars that have driven many American farmers into debt while raising the cost of goods for American consumers. China doesn't pay the tariffs on imports. We do.

Donald Trump is all about creating debt. He's a terrible financial decision-maker and his Presidential decisions have only increased this country's financial burdens. And yet, many millionaires and billionaires borrow sums of money you and I would never be able to pay back. How is it that all those wealthy people can go into debt and become even wealthier, whereas you and I just become poorer as we take on more debt?

This is the part of the discussion where someone starts talking about "leveraging" things. Do you know what it means to "leverage" something in business parlance? You borrow money against its net worth to cover the cost of buying it. We average consumers leverage things all the tine: homes, cars, appliances - you name it, we leverage it. You're probably leveraging things that cost less than $100 on HSN and QVC right now with their "Buy Now, Pay Later" programs.

With all this leveraging, you and I should be billionaires like Trump. But we're not. What are you and I doing wrong? That should go down in history as one of the great unsolvable problems. There are unsolved math problems that will find solutions before I become a millionaire.

Do I sound bitter? I'm just making a point. And my point is that it's really hard to follow the advice of wealthy people who sell books and seminars about how to become wealthy. How many of those books and seminars can you afford to buy? Should I be selling you the next financial success dream?

People in America have a big problem with debt. We cannot get out of it. That is one of the great unsolvable problems in life: how do we stop leveraging our lives? We keep living like the millionaires we are not.

There are some things I take great pride in not doing. I won't buy an SUV. Everyone I know who has bought an SUV financed it. They can barely make those car payments. They're lucky to have their jobs because they could be saving money by paying for less expensive vehicles. What 5-person family seriously needs a $50,000 SUV? There's no way to win that argument.

Our society loves unsolvable problems. We fight over them all the time. Here is one that I thought was really funny. Economists don't understand why investors prefer to buy stocks that pay dividends. The argument against buying dividend-paying stocks is that they are more expensive than capital growth stocks, stocks where you only make a profit when you sell them. Investors must pay higher taxes on dividends than on selling stock at a profit. So why are investors willing to pay more for dividend-paying stocks than others?

I think the answer to that question is simple: dividends are a form of taskless income. You don't have to do anything to generate that income once you own the stock. If I'm a big money fund manager and I buy 1 million shares of a stock that pays dividends, I can roll those dividends over into more shares of stocks. Yes, I'll have to pay higher taxes on the dividend income but meanwhile I'm compounding my stake in the company.

That is how dividend reinvestment programs work. Your dividends are automatically used to buy more shares in the company for you. You don't have to do anything but report the dividend income on your taxes. That's a pretty sweet arrangement for big investors and small. I don't know if Donald Trump does that but he'd be smart to keep the money flowing in. That might help him pay off some of those debts in a few decades.

You don't have to pick the best stocks. You can invest your money in ETFs, exchange traded funds, and there are plenty of such funds that only invest in the major stock indexes. So like Warren Buffett said, put your money into a Standard & Poor 500 index fund and leave it alone. It will grow because it will compound its dividends and the overall value of those stocks will go up over the years.

Meanwhile, just keep making payments on your car and house. But think about buying less expensive cars and houses going into the future. You don't have to trade up every time you get a raise, change jobs, or have a child.