What is other people’s money? When you buy real estate, you usually get a mortgage which is other people’s money. It is a way of leveraging your down payment in order to buy an asset. When you borrow money to buy a business, it is other people’s money. Whenever you borrow money to make an investment or financial transaction, you may be using other people’s money (OPM) in the form of a loan.
It does not take money to make money! It reminds me of a quote about firefighters. They are the people who run into buildings when everyone is running out! People who are wealthy buy when everyone is selling or take risks when everyone is risk averse. Do wealthy people know something the rest of us don’t? They have courage to do things when the rest of us don’t.
Money is officially legal tender defined by government exchanged for goods, services or debt. It is how we use it that will make you wealthy or just pay the bills. Money is used as payment for services such as payroll. You work and earn money in the form of a check, direct deposit or cash. If you own your own business, you need cash to give change, pay for goods and services or pay your employees. It is hard to live without money.
I live very well without cash! I have direct deposit for my paycheck; I use credit cards and avoid cash as much as I can. Some people would say I am using other people’s money by using credit cards for almost all of my purchases. Although it may be a credit card, I treat it as a charge card. I always pay it off at the end of the month. Using a credit card is a cash flow device. If I switched to cash, it would affect my budget! Besides I would lose out on rewards such as frequent flier miles, cash rebates and hotel points.
Many personal finance bloggers think debt is bad, but imagine buying a house with cash! The real power of money is using it which includes using other people’s money in the form of a mortgage. A 20% down payment with an 80% mortgage at 3% seems like a no brainer! If your home appreciates 5% a year, your down payment is earning a better than market return and you are earning more than you have to pay in interest. Sounds like a win/win!
The mortgage interest is tax deductible which means you are subsidized by the federal government to buy a home. Housing and businesses are subsidized by the federal government because it helps our economy. When I invested in apartment buildings I used leverage to buy an asset. Unlike a home, you can generate income from a business asset. I would buy an asset that I knew could increase by just making small improvements and generate more income. Very similar to any business,
Businesses are sold all the time and usually there is some financing involved. It is leveraging an asset. You are using other people’s money to buy an asset that you believe is undervalued and you think you can increase the income. You get to use other people’s money at probably 4-5% rate and you can generate more income that exceeds your expenses and generate a profit. Although you can expand or grow a business with profits generated internally, it will take longer.
Borrowing money will help you reach your goal faster or maybe reach economies of scale. It takes more management to operate small apartment buildings (duplex & fourplex) than owning larger buildings. That may mean borrowing more for either more units or larger buildings. Most businesses borrow money for their business. Doesn’t it make sense to borrow money that you may pay approximately 5-6% to earn a profit of 25-50%? It is the basis for business and the economy. Bankers are lending other people’s money for the margin they will earn.
Business does the same thing! They are looking at their profit margin and determining if they can afford to expand. They look at using their cash and/or borrowing funds (OPM) to generate better profits. The wealthy people have access to money in the form of other people’s money which helps them to buy assets. On a large scale, there are mergers in the airline industry to lower costs and generate more profit. Still, more often companies go public to generate cash to grow their company. The stock they sell draws other people’s money to help the company grow.
Although debt is a four letter word, it is not bad! If you can buy a business, assets or expand an existing business; you generally use a loan to do it. A loan is other people’s money who is earning a return on their money. I know there is a desire to reduce or pay off debt, but it should be debt that is not associated with an asset that appreciates or generates income. Using other people’s money to help you build up a portfolio of assets that will increase income or net worth is desirable.
Photo by: Alan Cleaver