The Value of Debt in Building Wealth

Creating Your Glide Path to a Healthy Financial L.I.F.E.
 
 
Standards Information Network (Verlag)
  • erschienen am 19. Januar 2017
  • |
  • 272 Seiten
 
E-Book | ePUB mit Adobe-DRM | Systemvoraussetzungen
978-1-119-04926-5 (ISBN)
 
The book of financial wisdom that your future self will thank you for reading
For many adults under 40, 'debt' is a four-letter word--something that should be avoided but is all too often unavoidable. In The Value of Debt in Building Wealth, bestselling author Thomas J. Anderson encourages you to rethink that. You'll walk away from this book with an understanding of how you can use debt wisely to secure the financial future you envision for yourself and your family. Student loans, mortgages, lines of credit, and other forms of debt are all discussed in detail, with a focus on smart planning for those who are accumulating assets--and debt--now.
Should you rent or buy? How important is liquidity? What is good versus bad debt? How much debt should you have? What debt-to-income and debt-to-asset ratios should you aim for? Fixed debt or floating debt? What's the best way of saving for college and retirement? These are big questions that deserve thorough answers because the choices you make now could influence the course of your life. This thought-provoking book will open your eyes to savvy financial strategies for achieving your goals faster and with healthier bank accounts.
* Explore strategies for smart debt management, explained by one of the nation's top financial advisors
* Gain an understanding of investment basics and key financial concepts you'll need to achieve your long-term goals
* Understand the risks of having debt and the potential risks of being debt-free
* Make financial decisions now that will maximize your wealth, freedom, and opportunity later
This book is not about buying things you cannot afford. It is about liquidity, flexibility and optimizing your personal balance sheet. The Value of Debt in Building Wealth is full of ideas you can apply to your own situation--no matter what your current asset level. Read this book today and thank yourself later.
1. Auflage
  • Englisch
  • New York
  • |
  • USA
John Wiley & Sons Inc
  • Für Beruf und Forschung
  • 1,15 MB
978-1-119-04926-5 (9781119049265)
weitere Ausgaben werden ermittelt
THOMAS J. ANDERSON is founder and CEO of Supernova Companies, a financial technology company providing a comprehensive platform focused on managing both sides of an individual's balance sheet. A nationally renowned financial planning expert, he is author of The Value of Debt, which made the bestseller list at The New York Times and USA Today.
Foreword xi
Acknowledgments xv
About the Author xix
Introduction xxiii
Chapter 1: The Traditional Glide Path 1
In a Perfect World, No Debt! But Our World Isn't Perfect 2
You Owe a Debt to Your Future Self 3
Break the Paycheck-to-Paycheck Cycle 4
Companies Embrace Balance 5
The Power of Savings 6
A New Glide Path: Debt Adds Value 8
Finding Your Glide Path 11
The Need for Specific, Actionable Advice 12
Endnotes 14
Chapter 2: Foundational Facts 17
All Debt Is Not Equal: Oppressive, Working, and Enriching Debt 18
Paying Down Debt Gives You a Return Equal to Your After-Tax Cost of That Debt 20
Sh*t Happens--Value Liquidity 20
Yes, You Can--Save 24
Compounding Matters--For the Upside and the Downside 26
The Past Is the Past; Focus on the Future 29
Behavioral Economics Matters 30
Endnotes 31
Chapter 3: A Balanced Path to L.I.F.E. 33
Phase 1: Launch! 37
Phase 2: Independence 51
Endnotes 62
Chapter 4: Freedom and Equilibrium 65
Phase 3: Freedom 66
Phase 4: Equilibrium 76
Bonus Phase: No Debt! 80
Endnotes 82
Chapter 5: The Other Side of the Balance Sheet 85
The Probability of an 8 Percent Rate of Return Is Zero 86
Risk, Return, and Diversification 87
What about Interest Rates and Cost of Debt? 95
What about One of Your Biggest Assets? Your House 97
Three Buckets of Money 99
Risk Matters--The Risk of Time 105
Factoring Leverage into Returns 107
Debt as an Integrated Part of Your Investment Philosophy 109
Endnotes 110
Chapter 6: Proof of the Value of Debt 113
The Big Picture--Debt Can Be Valuable 115
Children and College Savings 127
Interest Rates and Debt Service CoverageRatios 128
Endnotes 128
Chapter 7: Conclusion 131
Taking a Stand Against Conventional Wisdom 132
Endnotes 137
Appendix A: Phi Phound Me 139
Inspiration Arrived 140
Not Perfect Makes Perfect 142
Applying the Fibonacci Sequence 142
From 13 to 8 148
From 8 to 5 150
Super Cool Math 151
Endnotes 154
Appendix B: Understanding the Power of Securities-Based Lending 155
Case Study 156
The Power of Securities-Based Lending 159
First Bank of Mom and Dad 162
Endnotes 163
Appendix C: Home Purchase and Financing Considerations 165
Don't Rush to Buy a House 166
When Home Ownership Can Go Wrong 168
Save Yourself the Anguish 169
Be Careful! 170
All Mortgages Are Not Created Equal 171
Owning Can Be Great 175
Endnotes 176
Appendix D: The Millennial's Guide to Debt and Getting Started 179
Saddled by Student Loans 180
The Best Budget: Spend Less Than You Make 182
Debt-to-Income Ratios 185
Pulling These Concepts Together 188
Endnotes 188
Appendix E: The Math Behind the Examples 191
Chapter 1: The Nadas, Steadys, and Radicals 193
Chapters 3 and 4: Brandon and Teresa 199
Higher Income 210
Endnotes 216
Glossary 219
Resource Guide 225
Bibliography 231
Suggested Reading 233
Index 235

Chapter 1
The Traditional Glide Path


"It does take great maturity to understand that the opinion we are arguing for is merely the hypothesis we favor, necessarily imperfect, probably transitory, which only very limited minds can declare to be a certainty or a truth."

-Milan Kundera

In the traditional financial glide path, debt adds no value. It should be eliminated as fast as possible. Doing so is financially responsible, will increase security, save money, reduce stress, and put you on a better path to financial freedom. In this view, you typically hear:

  • Debt is bad.
  • You should be debt free when you retire.
  • Debt creates anxiety, stress, and pressure.
  • Having debt causes you to "waste money on interest."
  • All things equal, you would rather not have debt.
  • Debt increases risk in your life.
  • Being debt free is less risky than having debt.

I'm going to prove to you that this is not true. Together, we're going to rid ourselves of the anti-debt hysteria and explore a better, balanced way.

In a Perfect World, No Debt! But Our World Isn't Perfect


Debt is risky, and, in a perfect world, we would all rather avoid risk. The problem is that we do not live in a perfect world.

In their Nobel Prize-winning economic theorem, Franco Modigliani and Merton Miller hypothesize that capital structure (how much debt a company has) doesn't matter in a perfect world, but we don't live in one.1 In our imperfect world, how much debt companies carry matters quite a bit. Companies carry debt because it works for their bottom line even though they likely have the resources or could raise money to pay for things in cash.

People, on the other hand, do not have this luxury. Our ability to buy things is limited to our income, assets, and use of debt. No one would need debt if we could rent everything we want and need, under terms and conditions we find desirable, and at a cost equal to what it would cost to borrow money to buy. In this perfect world, most people would be neutral to renting versus buying-and renting would often make more sense.2 You don't buy a car and house for a one-week vacation in Hawaii. You rent because the terms and conditions are much better than buying. This same concept could apply to everything in your life, but it doesn't for a combination of financial and emotional reasons.

In our imperfect world, many people use debt to buy things they could not otherwise afford with cash they have on hand, including houses, cars, education, or investing in their small business.3 As a result, many-if not most-people choose to take on debt early in life and spend their lives trying to pay it down. Is this a good strategy? Should people borrow money? If so, how much should they borrow? How fast should it be paid down? How does buying compare to the alternatives?

HOUSTON-WE HAVE A PROBLEM!


The vast majority of us use debt as a tool at some point in our lives and race to pay it off because we perceive it adds little to no value and adds stress to our lives. At the same time, most people desire to ultimately retire, yet are not on track for retirement. Is it possible that we can find balance in this tug of war between paying off debt and being on track for retirement?

A survey of college graduates who make more than $50,000 per year indicates:4

  • 93 percent plan to retire by age 75 (and 86 percent before age 70).
  • 85 percent of those surveyed either have debt or plan to use debt at some point in their life.
  • 93 percent want to retire debt free.
  • Only 27 percent think it is even possible that having debt in retirement is a good idea.
  • 73 percent say that debt increases stress.
  • 96 percent would choose to not have debt if they had the choice.
  • 50 percent do not feel on track for retirement, and studies indicate that as many as 90 percent of Americans fail tests for meeting future retirement needs.5

You Owe a Debt to Your Future Self


Whether or not debt is bad or debt is good depends on your resources relative to your needs. If you can afford to pay cash for something, then paying cash might be a great idea. But whether or not you can afford it is just one part of a much bigger picture: If you want to retire, you owe a debt to your future self.

If you are 100 percent confident that retirement isn't an issue for you, then you have a lot of flexibility and could consider the potential benefits of paying cash for everything. However, most of us have to work and save in order to retire. I, for one, do not have enough money to retire tomorrow with the lifestyle I would like to live. For those of us in this situation, we have a dual mandate-we need to reduce our debt and save for retirement.

If you are like me, you want to enjoy the journey along the way, too. I want to see the world and live in a house big enough to host parties. I'm happiest by a campfire and I don't need anything extravagant, but I like doing some crazy things from time to time. If we want to also enjoy life, it's actually a tri-mandate!

Around most kitchen tables, a conversation begins whenever extra money comes in (perhaps a bonus or a raise). Should we pay down debt? Should we buy that thing we've had our eye on? Should we save toward retirement? Should that savings be in our retirement plan or in our investment account? And if we invest it, what should it be invested in? Maybe we should get that new house after all.

I've studied finance my entire life. There are about a million articles telling me how to invest my money, predicting the future (and generally being wrong), and feeding me financial news 24/7. Why do I feel like we are always guessing on these important decisions? What about my debt? How much should I have, and how should it be structured? Why does everybody tell me to get rid of it? I only have so much money; if debt is bad how do I handle my tri-mandate of saving, enjoying life, and paying down debt?

So how can I be responsible, have the things I want, enjoy life, yet save toward the future, be on track to retire, reduce anxiety, and increase flexibility? I value flexibility and hate being trapped; I want freedom. Will being debt free give me freedom? Or is there another way?

Break the Paycheck-to-Paycheck Cycle


Money flows into every household like water through a hose. When all is well, it flows freely and abundantly. But a kink in the hose (loss of a job, a serious medical condition, even a natural disaster) could stop the flow. If you haven't been storing water in cisterns, you and your family will be parched and in peril.

Too many Americans are in exactly that position. According to one survey, 76 percent of Americans live paycheck to paycheck, fewer than one in four has enough money saved to cover at least six months of expenses, and 27 percent have no savings at all.6 A separate survey found that 46 percent of Americans have less than $800 in savings.7 The estimated collective savings gap for working households 25-64 is estimated to be between $6.8 trillion and $14 trillion. Two-thirds of working households age 55 to 64 have not saved more than one year's worth of salary.8 The well is not deep enough to sustain them through a crisis.

Is it possible the conventional wisdom that debt is bad has contributed to our savings gap? I believe our anti-debt mentality is contributing to the fact that we are dramatically under saved and ill prepared for crisis. I believe it's time to consider a new glide path and to break this cycle.

I believe there is a better, balanced, and simple way to accumulate wealth by using both sides of your balance sheet-your assets and your debts.

Companies Embrace Balance


Every successful company in the world has a chief financial officer (CFO) who looks holistically at the company's finances to maximize resources and profits. You and your family are not a company, and I understand that there are important differences. But a CFO's raison d'être is to do well financially, and we can learn some important, broad lessons from CFOs as we establish our personal, financial glide path. I believe one of the important tips we can take from CFOs is how they work both sides of the balance sheet to design and implement an overall debt philosophy and establish lines of credit as part of a holistic picture.

Structuring the right amount of debt in the right way is critical because too much risk could bankrupt the company and too little debt could leave it vulnerable. Once they've found their formulas, most CFOs keep fairly constant debt ratios from year to year.9 Every corporation in the world uses debt as a tool to fund operations and leverage opportunities, and you and your family should, too.

WHO NEEDS AN AAA RATING?


Only two companies in the United States issue AAA bonds.10 AAA bonds mean a company has the highest possible credit rating and generally the least amount of debt.

Pick a large company you admire, and chances are high that its bonds do not have the highest credit rating. Make no mistake, this is a proactive choice by the CFOs and they are well aware that they do not have the highest rating. These companies could easily choose to be AAA, but they don't see the value in having the highest credit rating.

They've chosen to embrace the...

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