The Value of Debt in Building Wealth by Thomas J. Anderson

Author:Thomas J. Anderson
Language: eng
Format: epub
ISBN: 9781119049265
Publisher: Wiley
Published: 2017-01-17T00:00:00+00:00

Chapter 6

Proof of the Value of Debt

“In a gentle way, you can shake the world.”

—Mahatma Gandhi

I've laid out a glide path for the different phases in your L.I.F.E. and I have talked about the other side of the balance sheet, assets. Key questions remain: Is the glide path better, and if it is better, how much better?

Let's do a quick recap. I created a four-phased glide path based on your net worth relative to your income. I suggested that in the Launch phase people should not have debt and should focus on savings. In the Independence phase, I outlined a prudent starting level for debt as a percentage of your net worth, leveraging the power of debt to get the things we otherwise cannot afford, such as a house. Then, in the Freedom phase, I showed how this percentage can fall by building up assets instead of by paying down debt and encouraged you to build up assets. The benefits of an early base of assets are liquidity for emergencies and the ability to harness the power of compounding. In the Equilibrium phase, I showed how debt ratios can fall even further, toward an optimal range, by continuing to build up assets instead of paying down debt.

It is essential to remember that I started by saying that not everybody needs debt. If your net worth is more than 15 to 20 times your income, and/or if you have more than 20 years until retirement and your savings rate is higher than 20 percent, you can carefully consider if you need debt and the Value of Debt®. For the fortunate few of you that have a net worth of more than 30 times your annual income, then the risk of debt may not be worth the potential reward. However, for those who have a net worth less than 20 times their annual income, the vast majority of the population, I'm going to prove that debt can add value.1 Table 6.1 summarized suggestions for determining how much debt to hold.

Table 6.1 The Debt Glide Path

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