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Business // Thinking Smart
David S. Chang

Secrets Of The Wealthy, Part 3

Last week we covered part two of secrets the wealthy use to become financially independent. This week we cover secret investment products and strategies.

* Senior Secured Investments. Previously only wealthy institutional investors could invest in this type of asset class, also known as a Business Development Corporation (BDC). Recently BDCs have opened up so more investors can participate. Money is pooled together to create a fund, which is lent to companies as debt, just like a bank. The benefit is that the collateral is usually first or second tier, meaning if anything should happen to the company, the BDC investors are the first to get paid out. When GM went bankrupt, the Senior Secured Lenders got virtually every dollar back, bond holders got 20 cents on the dollar, and stock holders unfortunately got nothing. Many BDCs also have the interest rate pegged to an inflation index, which means if inflation goes up, the interest rate also goes up. A BDC is an excellent way to generate stable income with potential inflation protection and lower your investment risk. You may not see the potential capital appreciation as with a stock, but you can be protected from much of the downside with solid cash flow.

* Create Legal Entities To Pay You. Depending on where your primary income comes from, creating a corporation or LLC can help you manage your taxes and expenses better. It is easier to deduct some of your business expenses and avoid the Alternative Minimum Tax. This will put you in a lower tax bracket. Legal entities also can shield you from liabilities. With society becoming more litigious, the wealthy look to protect themselves from frivolous lawsuits.

* Create Trusts. There are many different types of trusts, and the wealthy make use of them wisely. Mark Zuckerberg, the founder of Facebook, put his pre-IPO stock into a grantor retained annuity trust (GRAT). According to Forbes, “Future payouts will avoid the 45 percent gift tax that existed (in 2008) when these trusts were created … a GRAT is especially useful for stashing away hard-to-value assets, like private companies shares, because it allows changes to the trust’s details if you’re audited.” Creating trusts helps you efficiently transfer your wealth by avoiding probate, avoid unnecessary taxes, and secure your legacy by controlling how the money is spent.

* Use Other People’s Money (OPM). The wealthy aren’t afraid to take out good debt and use it to increase their assets. With interest rates at historic lows, they borrow cheap money and use it as leverage for a higher return on their investments. Instead of putting 100 percent down for one piece of real estate, they put 20 percent down and borrow for five pieces of real estate, earning the extra cash flow or selling them off for potentially five times the gain. Of course, there is more risk associated with using OPM, but the wealthy are willing to take educated risks.

* Start Your Own Business. Of the 1,426 billionaires in the world, almost all of them did it through starting a business. You can’t make 10 figures going through the corporate ranks. They started their business from scratch, either as a sidepreneur (starting business on the side), intrapreneur (started a business within an existing one) or just following their entrepreneurial spirit!

david@artofthinkingsmart.com

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