The Value of Debt in Building Wealth
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. 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.
The Value of Debt in Building Wealth
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."
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.