Billionaire Mark Zuckerberg made news recently when he refinanced the $5.95 million mortgage on his Palo Alto, Calif., home with a 30-year adjustable-rate loan starting at 1.05 percent. The question I keep hearing folks ask is, “Why does a billionaire like Mark need a mortgage on his home? Why doesn’t he just pay it off with cash?
That, my friends, is indeed the million-dollar question. The answer lies in the fact that Mark ascribes to my definition of being debt-free. While most financial gurus believe all debt is bad, I don’t. I believe that there’s good debt and there’s bad debt. Bad debt does not increase your personal net worth nor does it provide any tax benefits. Good debt either increases your personal net worth or provides tax benefits. A mortgage is an example of good debt.
Most define debt- free as having absolutely no debt. I define debt-free as eliminating all forms of bad debt and wisely using good debt to accumulate a pool of funds that’s liquid, accessible, earns a real rate of return, in your control and that can serve as collateral. With funds accumulated in this manner, you can now make the decision to pay off the good debt that you have – if you deem that to be a prudent use of your money.
What Mark is doing definitely fits this description. If you had the choice of being debt-free with $12 million in assets and $2 million in good debt or being debt-free with $2 million in assets and no debt, which would you choose? I’d choose the former and apparently so has Mark.
So what other lessons can young Mark Zuckerberg teach us? Here are a few:
• Time Value of Money Lesson: Inflation teaches us that our money is most valuable to us today. That is why taking out an interest-only loan and deferring the payment of principal owed to the bank until sometime later in the future is a prudent money lesson you should pay attention to.
• Leverage Lesson: Leverage is the use of borrowed capital to increase the potential return on investment. The less money you put into the purchase of a home, the higher your return on investment. Using “Other People’s Money” (OPM) is a proven method to accumulate wealth.
• Liquidity, Use and Control (LUC Factor) Lesson: Paying cash for a house violates a very core economic and financial principle I teach my clients which is that at all times, CASH is KING. You must do everything you can in the way you manage or invest your money to make sure you maintain liquidity, use and control of your funds. To be financially successful in life, I tell my clients they’ll need a lot of “LUC.”
• Collateral Capacity Lesson: Having collateral capacity on where your funds are invested allows you to use “Other People’s Money” to create even more wealth. This fact alone is why Mark obtained a preferential rate of 1 percent on his mortgage loan.
• The Spread or Arbitrage Profit Lesson: This refers to the amount of money that can be made on the difference between the cost of borrowing versus what can be earned on those borrowed funds. This is one way that banks make a ton of money and a very powerful money lesson for you in regards to your own money.
• Velocity of Money Lesson: This speaks to the ability to get multiple investment uses out of the same dollar. It’s the equivalent of having $100,000 in two separate investments and reaping the benefits of what each investment yields.