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

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      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.7 A separate survey found that 46 percent of Americans have less than $800 in savings.8 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.9 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.10 Every corporation in the world uses debt as a tool to fund operations and leverage opportunities, and you and your family should, too.

      There's an incredible disconnect between how companies and individuals look at debt: Almost all successful companies use debt as a tool to provide liquidity and a cushion for emergencies and opportunities, but very few individuals and families are even willing to think about this strategy. Individuals and families tend to either have too much debt or want to pay off all of their debt as soon as they can. In our new financial glide path, we'll take a CFO-like approach and work both sides of our balance sheet.

      The Power of Savings

We need to frame questions about debt, savings, and balance against the fact that compounding matters to long-term investment returns. Table 1.1 shows that to retire with $1 million, you can choose to save any of the following:

Table 1.1 Summary of Savings Rate to Accumulate $1 million by 65