Everyday folks are starting to use the financial tactics previously reserved for the elite, learning from the secrets of the wealthy for enduring prosperity. What was once a strategy only for the mega-rich, now common citizens are delving into the method of borrowing to invest and moving assets cleverly to sidestep hefty capital gains taxes.
A startling 61% of Americans today are more anxious about depleting their funds than they are about facing their own mortality. This alarming figure paints a picture of the financial unease gripping the nation. The rich have often used a financial formula dubbed “Buy, Borrow, Die.”
This model, crafted years ago by scholar Ed McCaffery, remains a crucial key in understanding the wealth gap between the well-off and the less fortunate. While purchasing real estate has traditionally been seen as a step towards financial stability and growth, it’s becoming a dream too distant for many in today’s market. However, there’s more than one way to use the “Buy, Borrow, Die” method. Financial experts suggest that everyday investors can begin their journey to prosperity by applying a more straightforward version of this blueprint.
How Borrow Works in Practice
The “Borrow” step in the “Buy, Borrow, Die” method means using what you own as collateral to borrow more money and never selling assets. Instead of selling what you have, which means you incur taxable gains, you can borrow against your existing assets to get a loan, or to invest in additional assets, a process known as leverage.
In this manner, people can accumulate wealth without legally having to pay taxes. For those buying their first home without many assets, some wealthy families use their parents’ assets for backup. Borrowing using your parent’s property or against a portfolio of stocks can help finance the initial payment, without having to sell your own securities and first pay taxes on any gains. Of course, when using leverage investors need to be careful.
Death and Estate Planning
Wealthy often take advantage of smart estate planning with the goal to leave as much as possible to their family when they’re gone. The goal is to use a tax rule called “stepped-up basis.” This means that when someone passes away, the IRS looks at the value of their stuff at that time, not what they first paid for it.
This way, the family doesn’t pay extra taxes on the increase in value, and in some cases families with larger amount of wealth utilize trusts or gifts to increase wealth passing beyond the maximum estate cap of $12.92 million.
A lot of people know it’s good to buy assets that grow in value over time, and avoiding paying taxes helps your money compound as efficiently as possible. This three-step plan is used by the wealthy to help avoid some taxes and grow your money by borrowing against what you already own. By understanding and using plans like this, more Americans can make their money work better for them and hope to grow future wealth for their families as well.
Josh is the owner and lead writer at Daily Wisely. His career has taken him from finance to blogging, and now shares his insights with readers of Daily Wisely.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh has over 15 years of experience on Wall Street, and currently shares his financial expertise in investing, wealth management, markets, taxes, real estate, and personal finance on his other website, Top Dollar Investor.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business.