The Value of Debt in Building Wealth

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.

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 Coverage Ratios 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

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.

Conventional financial management advises people to pay off debt as quickly as possible, but The Value of Debt in Building Wealth turns this idea on its head and shows you how to strategically use debt to your advantage. This comprehensive road map provides specific and actionable direction on how to leverage both sides of your balance sheet so you can establish a financial safety net, grow your personal wealth, support your dreams, and save for retirement.

In his bestselling The Value of Debt, nationally renowned financial planning expert Thomas Anderson introduced his thought-provoking approach to growing wealth by incurring strategic and purposeful types of debt. In this long-awaited follow-up, he applies his widely proven approach to all stages of your financial life with up-to-date case studies and a tangible framework that makes it easy to custom-fit his methodology to your unique circumstances and practice it in the real world. He provides tools and specific guidance for optimizing your assets and debt in order to evolve into the next phase and eventually retire—possibly making more money than you did when you were employed! The cornerstone to his accessible approach lies in the power of compound interest, one of the most basic investing principles, and this extensive guide offers in-depth discussions on the asset side of your personal balance sheet with actionable ideas on risk, return, and diversification so you can capture the spread over time in bull and bear markets. From investment basics to the nuances of fixed and floating debt, this authoritative guide shows you how to make debt work for you, and includes discussion of:

• Where you should direct your cash flow funds
• How to get a very important jumpstart on maximizing your investments earmarked for retirement
• The importance of liquidity and lines of credit

The Value of Debt in Building Wealth reveals a path to balance and financial security through optimizing your resources.