Table of Contents Cover Title Page Copyright Dedication Foreword Acknowledgments About the Author About Supernova Companies Introduction Endnotes Chapter 1: The Traditional Glide Path In a Perfect World, No Debt! But Our World Isn't Perfect You Owe a Debt to Your Future Self Break the Paycheck-to-Paycheck Cycle Companies Embrace Balance The Power of Savings A New Glide Path: Debt Adds Value Finding Your Glide Path The Need for Specific, Actionable Advice Endnotes Chapter 2: Foundational Facts All Debt Is Not Equal: Oppressive, Working, and Enriching Debt Paying Down Debt Gives You a Return Equal to Your After-Tax Cost of That Debt Sh*t Happens—Value Liquidity Yes, You Can—Save Compounding Matters—For the Upside and the Downside The Past Is the Past; Focus on the Future Behavioral Economics Matters Endnotes Chapter 3: A Balanced Path to L.I.F.E Phase 1: Launch! Phase 2: Independence Endnotes Chapter 4: Freedom and Equilibrium Phase 3: Freedom Phase 4: Equilibrium Bonus Phase: No Debt! Endnotes Chapter 5: The Other Side of the Balance Sheet The Probability of an Percent Rate of Return Is Zero Risk, Return, and Diversification What about Interest Rates and Cost of Debt? What about One of Your Biggest Assets? Your House Three Buckets of Money Risk Matters—The Risk of Time Factoring Leverage into Returns Debt as an Integrated Part of Your Investment Philosophy Endnotes Chapter 6: Proof of the Value of Debt The Big Picture—Debt Can Be Valuable Children and College Savings Interest Rates and Debt Service Coverage Ratios Endnotes Chapter 7: Conclusion Taking a Stand Against Conventional Wisdom Endnotes Appendix A: Phi Phound Me Inspiration Arrived Not Perfect Makes Perfect Applying the Fibonacci Sequence From 13 to From to Super Cool Math Endnotes Appendix B: Understanding the Power of Securities-Based Lending Case Study The Power of Securities-Based Lending First Bank of Mom and Dad Endnotes Appendix C: Home Purchase and Financing Considerations Don't Rush to Buy a House When Home Ownership Can Go Wrong Save Yourself the Anguish Be Careful! All Mortgages Are Not Created Equal Owning Can Be Great Endnotes Appendix D: The Millennial's Guide to Debt and Getting Started Saddled by Student Loans The Best Budget: Spend Less Than You Make Debt-to-Income Ratios Pulling These Concepts Together Endnotes Appendix E: The Math Behind the Examples Chapter 1: The Nadas, Steadys, and Radicals Chapters and 4: Brandon and Teresa Higher Income Endnotes Glossary Resource Guide Basic Information Inflation, Interest Rates, and Compound Interest Housing Introduction to Stocks and Bonds Investment Vehicles Credit Score Calculators Endnotes Bibliography Books Text Books Nobel Prize–Winning Theories Articles Suggested Reading Endnotes Index End User License Agreement List of Illustrations Chapter 5: The Other Side of the Balance Sheet Figure 5.1 Risk/Return Trade-Off of Different Investments from 1970 through 2015 Figure 5.2 Risk/Return with an Equally Weighted Portfolio Figure 5.3 Rolling 10-Year Data Points Appendix A: Phi Phound Me Figure A.1 A Representation of the Fibonacci Sequence List of Tables Chapter 1: The Traditional Glide Path Table 1.1 Summary of Savings Rate to Accumulate $1 million by 65 Chapter 2: Foundational Facts Table 2.1 Oppressive, Working, Enriching Debt: You OWE It to Yourself to Understand the Differences Table 2.2 The Power of Compounding Interest Chapter 3: A Balanced Path to L.I.F.E Table 3.1 A Sample Balanced Path—Launch! Table 3.2 Instructions (Assume annual income of $60,000 and monthly income of $5,000) Table 3.3 Blank Phase 1: Launch! Table 3.4 Ramping Up Savings Table 3.5 Ramping Up Savings—Higher Income Table 3.6 Not All Student Debt Is Equal Table 3.7 A Sample Balanced Path—Independence, No House Table 3.8 A Blank Balanced Path Worksheet—Phase 2: Independence, No House Table 3.9 A Balanced Path Worksheet—Phase 2: Independence, Buying a House Table 3.10 Balance Sheet after Home Purchase Table 3.11 Dual Income, No Kids Ready to Buy a Home Table 3.12 Dual Income No Kids after Purchasing a Home Table 3.13 A Blank Balanced Path Worksheet—Phase 2: Independence, with a House Table 3.14 Recommendations for Dealing with Debt Chapter 4: Freedom and Equilibrium Table 4.1 Brandon and Teresa Balance Sheet after Home Purchase Table 4.2 Brandon and Teresa—Phase 3, Freedom Table 4.3 Brandon and Teresa Balance Sheet—End of Freedom Phase Table 4.4 A Blank Freedom Worksheet—Debt Based Table 4.5 A Blank Balanced Path Worksheet—Phase 3: Freedom, Income Based Table 4.6 A Blank Balanced Path Worksheet—Phase 3: Freedom, No Home/Renting Table 4.7 Brandon and Teresa Entering Equilibrium Table 4.8 Brandon and Teresa—Near Equilibrium Table 4.9 A Blank Equilibrium Worksheet Table 4.10 Trinity Study Summary Table: Probability of Success of Different Distribution Rates over a 30-Year Period—With and Without Debt Chapter 5: The Other Side of the Balance Sheet Table 5.1 The Six Worst Years for Individual Assets (1970–2015) Table 5.2 One Opinion on an Asset Allocation Framework to Consider Table 5.3 Balance Sheet—Scenario A Table 5.4 Income Statement—Scenario A Table 5.5 Balance Sheet—Scenario B Table 5.6 Income Statement—Scenario B Chapter 6: Proof of the Value of Debt Table 6.1 The Debt Glide Path Table 6.2 Interest Rates and Mortgage Rates from 1980 to 2015 Appendix A: Phi Phound Me Table A.1 Blank Phase 1: Launch! Table A.2 A Blank Balanced Path Worksheet—Phase 2: Independence, No House Table A.3 A Blank Balanced Path Worksheet—Phase 2: Independence, with a House Table A.4 A Blank Freedom Phase Worksheet—Debt Based Table A.5 A Blank Equilibrium Worksheet Table A.6 Savings Rate and Years to Get to Various Fibonacci Numbers Appendix B: Understanding the Power of Securities-Based Lending Table B.1 Brandon and Teresa Midpoint of Equilibrium Table B.2 Brandon and Teresa vs Amy and Bill—7 Years after Midpoint of Equilibrium Appendix E: The Math Behind the Examples Table E.1 The Nadas, Month Table E.2 The Nadas, Month 142 Table E.3 The Nadas, Month 360 (age 65) Table E.4 The Steadys, Month Table E.5 The Steadys, Month 360 (age 65) Table E.6 The Radicals, Month Table E.7 The Radicals, Month 360 (age 65) Table E.8 The Radicals, Age 105 Table E.9 Phase 1, Launch—Brandon and Teresa Starting at Zero, Age 25 Table E.10 Phase 1, Launch—Brandon and Teresa, Three Years Later Table E.11 Year 4, Starting Phase 2, Independence Table E.12 Phase 2, Independence after years Table E.13 Phase 2, Independence—Buying a House, Brandon and Teresa Age 40 Table E.14 Brandon & Teresa Approximate Balance Sheet after Home Purchase, Age 40 Table E.15 Phase 3, Freedom Worksheet—Brandon and Teresa Debt Based at Age 50 Table E.16 Brandon and Teresa Balance Sheet at 50 Years Old Table E.17 Phase 4, Equilibrium Worksheet for Brandon and Teresa at age 67 Table E.18 Phase 2, Independence—Dual Income Ryan and Allison, Age 35 Table E.19 Ryan and Allison Balance Sheet at Age 35 Table E.20 Phase 3, Freedom Worksheet—Ryan and Allison at Age 40 Table E.21 Approximate Balance Sheet at Age 40 Table E.22 Equilibrium Worksheet for Ryan and Allison at age 67 Table E.23 Approximate Balance Sheet for Ryan and Allison at Age 67 The Value of Debt in Building Wealth Creating Your Glide Path to a Healthy Financial L.I.F.E Thomas J Anderson Copyright © 2017 by Thomas J Anderson All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no 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of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data: Names: Anderson, Thomas J (Certified investment management analyst) Title: The value of debt in building wealth / Thomas J Anderson Description: Hoboken : Wiley, 2017 | Includes bibliographical references and index | Description based on print version record and CIP data provided by publisher; resource not viewed Identifiers: LCCN 2016046388 (print) | LCCN 2016058654 (ebook) | ISBN 9781119049258 (pdf) | ISBN 9781119049265 (epub) | ISBN 9781119049296 (hardback) Subjects: LCSH: Debt | Loans, Personal | Finance, Personal | BISAC: BUSINESS & ECONOMICS / Personal Finance / Money Management Classification: LCC HG3701 (print) | LCC HG3701 A635 2017 (ebook) | DDC 332.024/02–dc23 LC record available at https://lccn.loc.gov/2016058654 ISBN 9781119049296 (Hardcover) ISBN 9781119049258 (ePDF) ISBN 9781119049265 (ePub) Cover Design: Wiley interest tax deduction, definition introduction, resource guide one-way liquidity traps options payment, resource guide permanent debt rates, ranking resource guide savings rate, elimination securities-based lending, relationship tax deductibility, reduction (impact) Mother Nature, impact Municipal bonds definition Mutual funds, level Nadas assumptions example house payment illustrations Month 0, levels Month 142, levels Month 365 (age 65), levels retirement usage spending habits, change (absence) Natural disasters, impact Negative correlation, definition Negative spread Net worth annual income, relationship calculation process definition level, impact No-debt family, example No-debt path No-debt strategy No-down-payment mortgage options Nominal return, resource guide Null hypothesis One-month LIBOR interest-only floating rate ARM One-way liquidity traps Open-ended mutual funds, resource guide Opportunity cost definition Oppressive debt absence definition elimination examination reduction zero level value Ostrich (personality trait) Ownership See Home ownership access, examples total cost Parent PLUS Partial advice, problem Paycheck-to-paycheck cycle, breaking Payday loan, definition Pay-down-debt path Permanent debt Phi, impact Portfolio diversification return stock and bond mix value Position size definition Positive correlation, definition Prepayment penalties, absence Preserve bucket, definition Principal amount definition locked-in portion Private amortized loans, usage Private Mortgage Insurance (PMI) Private student lenders (experiences), Consumer Financial Protection Bureau survey Private student loan family usage Probability event Property taxes Radicals age 105 assumptions example illustrations investment values Month 0, level Month 360 (age 65), level mortgage interest payment retirement usage spending habits, change (absence) Real estate prices, levels values, reduction Real return, resource guide Rebalancing, definition Recessions occurrence severity Renting buying, contrast guidelines resource guide impact insurance form preference, exceptions Rent, money (waste) Rent-versus-buy math Residential real estate, inflation (relationship) Resource guide adjustable rate mortgages, resource guide Retirement approach debt-free status employer-sponsored retirement plans, millennial contributions expenses (coverage), after-tax basis (usage) issue level Nadas, usage plan, additions possibility probability, increase Radicals, usage redefining savings deemphasis Steadys, usages Retirement savings calculation direction increase introduction Return leverage, factoring reduction, debt (impact) risk/diversification, relationship Return rate definition probability Risk concept consideration definition high-risk strategies impact importance/impact increase, debt (impact) predictability level reduction, debt (impact) return/diversification, relationship standard deviation Risk/return equally weighted portfolio, usage trade-off Rolling 10-year data points Roth IRAs, resource guide Russell 3000 bond indices, constancy Savings ability car payments, exclusion focus future, focus increaset investing, difference power total level, determination Savings account cash, increase cash reserve checking account, separation Savings rate assumption control doubling elimination Fibonacci numbers impact summary Securities-based lending (SBLs) banking case study fee financing interest rates mortgages, relationship power, understanding prepayment penalties, absence principles selection, reasons Securities, definition Selling costs Seven Habits of Highly Effective People (Covey) 70/30 stock-and-bond portfolio Seven-year interest-only ARM Shiller price/earnings ratio Shiller, Robert Simple interest Single-income household Social Security dependence estimator, resource guide payment Speculative venture, shares Spread, capture definition Stagflation, resource guide Standard deviation, definition Standard & Poor's 500 (S&P500) beating Stanley, Thomas Start-up company, shares (usage) Steadys assumptions example illustration Month 0, level Month 360 (age 65), level mortgage payment retirement usage spending habits, change (absence) Stock markets crash valuation Stocks bonds, contrast (resource guide) rate, average resource guide Strategic debt embrace Strong-dollar periods Student debt absence after-tax interest expense equivalence, absence exclusion impact liquidity trap Student loans impact private student loan working debt, term (usage) Success, probability Target date funds (TDFs), definition Taxable savings, calculation Tax benefits, valuation Tax-deferred, term (definition) Taxes, reduction debt, impact Tax factor, impact Tech wreck, initiation Ten-year interest-only ARM Thirty-year fixed mortgage, usage Thirty-year fixed rate mortgages Time horizon Time, risk Time value of money, resource guide Total assets, components Total debt, components Total investment assets Traditional mortgages, corporate debt (contrast) TurboTax, usage Underwriting, limitations Unemployment, increase Upfront transaction costs U.S assets, problems U.S stock-and-bond portfolio Value (addition), debt (impact) Volatility, definition Weak-dollar periods Wealth accumulation See also Long-term wealth accumulation considerations building Wisdom, contestation Working debt definition term, usage Yield curve WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley's ebook EULA ... Matters The Risk of Time Factoring Leverage into Returns Debt as an Integrated Part of Your Investment Philosophy Endnotes Chapter 6: Proof of the Value of Debt The Big Picture Debt Can Be Valuable... about debt The Nadas want to get rid of it as fast as possible The Steadys are OK with it as long as they build up their savings The Nadas direct all of their savings to paying off the house The. .. they both live in a house of the exact same value so the value of the house isn't relevant The Nadas paid off their house in 142 months, or in a bit under 12 years They have owned their home free