Debt: Borrowing Against Assets

Very basic review.

Approach	Details	Net after 1yr
You earn $1m in a year in w2 salary.	You pay standard income tax on it. Effective tax rate is about 50%.	+$500k
You earn $1m in a year as RSUs/grants.	You pay tax on that as income (when it vests), so ~same as case 1.	+$500k
You earn $1m in a year as options.	You pay to exercise the options, and you pay AMT. Totally depends on strike price, purse size, many factors – but assume the company is appreciating, and you’re willing to eat the basis for future gains. Assume a pretty similar net expense as cases 1 and 2.	+$500k
You take out a $1m 1yr loan against your assets (assumes, of course, you have ~3x collateral).	Say 10% interest. You pay 0 tax on it. Then you pay the principal+interest back.	-$100k

But note too in the loan case: you take out the loan not to sit there, but to use. So you only have illiquid PE and have something expensive to handle, and your next tender offer is 2 years away. So you basically get to advance your paycheck of the stock sale, at a 10% hit. The sale of asset X is usually a gain, so you’re taxed on that exit, but let’s ignore that too (maybe it’s cash).

You don’t “pay yourself with debt” – instead:

1. Debt can be used as necessary when the rest of your portfolio is temporarily illiquid and you need liquidity.
2. Debt can be used at will when your investment strategies can outperform interest rates.

Obviously, credit cards are used for these exact two purposes. Short-term loans. #1 as (basically) a paycheck-forwarding system. And #2 because interest is 0 if you pay it off every month. So any strategy (rewards programs, cashback) outperforms interest (if you pay it off).

Mortgages qualify for this as well. #1 because houses are usually SO expensive that you are not liquid enough in the first place. You’re forced to borrow. But even in the cases of wealth, #2 is applicable because the borrow rate is cheaper than the longterm investment market (most people can beat 3% over time).

Leverage is probably the most common case, outside of standards like cards/houses. This is purely #2. You can beat the borrow rate, so you magnify your position to increase returns. Used to grow quickly (personal portfolio, business, whatever) by adding risk.