Winnipeg Free Press - PRINT EDITION

Don't dread the red

Debt shouldn't be a source of fear and loathing, argues author

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Among the chorus of voices saying we're too indebted and need to pay off what we owe ASAP, Thomas J. Anderson is singing a different tune.

The author of a new book that's stirring a bit of controversy, Anderson says instead of fearing debt, we should learn to embrace it.

Quick facts:


The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth

By Thomas J. Anderson

Wiley, 245 pages

Available at; Chapters Indigo and McNally Robinson

Price $48


The five tenets of a strategic debt philosophy:

U.S.-based financial adviser Thomas Anderson suggests using debt strategically to have funds to deal quickly with disasters like a home fire, health crises and personal difficulties. A sound approach to debt can also help generate tax-favoured and potentially tax-free income in retirement, fund the purchase of a second home in a less costly manner and make you progressively wealthier by capturing the spread between the cost of debt and the return on investment. Here are Anderson's top five tips to ensure if you're going to borrow to get ahead, you'll do it right the right way.


1. Adopt a holistic approach: Too often we can look at our finances in silos, but we need an integrated strategy that includes our goals, dreams, needs and current situation. While debt strategies certainly should involve a repayment plan first and foremost, they should also be mindful of how they can increase retirement income, reduce taxes and address end-of-life concerns like long-term care and estate planning.


2. Think like a business: Companies are objective about debt and finances, whereas for individuals the topic can be clouded by emotion. But the more individuals approach debt financing like a business the better off they'll be financially. When used as a means to an ends, so long as it's not being used to purchase items we can't afford, it can increase our long-term wealth.


3. Commonly held views of debt aren't always right: Calls for avoiding personal debt may sound prudent but it's not a one-size-fits-all statement. Anderson even challenges the notion dying with debt is undesirable. What's important, he says, is ensuring at the end of the day your assets outweigh your liabilities. To that end, individuals' and families' overall financial well-being can really benefit when they attain and manage their optimal debt ratio.


4. Find your optimal debt ratio: This figure is an indication of your balance sheet health, a ratio that measures your assets versus your liabilities. To calculate this, Anderson uses what's referred to as the debt-to-asset ratio. That's your total debt divided by your total assets to come up with a percentage. In his opinion, the ideal percentage is between 15 to 35 per cent.


5. Keep an open mind: Don't assume everything you read about debt is appropriate for your situation. Be sure to ask questions and explore theories thoroughly before implementing strategies. In other words, do your research and examine different perspectives before making a decision.

But his book -- titled The Value of Debt -- isn't suggesting we spend freely and leave an indebted corpse.

"It's essential to know that my book isn't about buying things that you can't afford," the Chicago-based financial planner says. "It's about finding better ways to pay for things that you can afford."

Anderson is a big proponent of living within your means, but his book is apt to raise the ire of debt hawks worried we've become addicted to spending on credit. Anderson says they shouldn't judge his book by its cover alone.

"My message is not 'I've been thinking about buying a Maserati; this book says debt is good, so I'm buying one.' "

Instead, Anderson wants us to be better borrowers. The problem is nobody has taught us -- from grade to graduate school -- to use personal debt to our advantage.

"I went to a whole bunch of top finance schools from Washington University to Wharton to the University of Chicago and London School of Economics," says Anderson, named one of the top 1,000 financial advisers in the U.S. from 2009 to 2011 by Barron's magazine.

"How many classes do you think I had about my personal debt? None."

The answer is likely the same for most people.

"Debt is such a huge piece of the economy and our lives but we don't study or talk about it, so what happens is there are many people who tend to have way too much debt or they're completely debt-averse and they don't have any debt at all," he says. "I think very few people are in the optimal middle target zone and being strategic about it."

Anderson doesn't argue with the fact many households carry too much debt.

"Once you have too much debt, the issue becomes more complicated, because the question then becomes how do you step in and pay that debt down, or are there any other alternatives?"

But even when we're weighed down by it, paying debt down blindly doesn't always yield the results we intend.

"Imagine that you have a $500,000 mortgage and I give you a $100,000 bonus and you put that down on your house," Anderson says. "Then you lose your job. Can you get that money back? Well, you can't refinance your house when you've lost your job, but you have to keep making that next month's payment."

In other words, with a little bit of planning, that lump sum of money could have been better put to use. Sure, a portion can reduce overall debt, but Anderson's point is we can become so obsessed with paying debt we are blind to the potential pitfalls.

For example, many people often focus on debt repayment without building up an emergency fund of liquid cash at the same time. And that's a problem.

"In 2008, when we faced a liquidity crunch, more than anything, cash was needed by people and businesses alike to ride out the storm," he says.

In some instances, credit can even serve as an emergency reserve. A line of credit, provided it's not used for consumptive spending such as buying the 80-inch HDTV, is a good source of emergency cash.

"Number one, I believe people should save money, and you should spend less than you earn."

But Anderson also contends individuals need to approach debt as businesses do.

"In the United States of America, there are less than five AAA companies, but if you think about it, Wal-Mart and Coca-Cola could choose to be AAA, but they choose to take on some debt," he says. "Companies this year in record numbers are issuing debt at longer term levels; they're locking in low rates and refinancing their debt, but they also are building up their liquid reserves -- their cash -- so they're running this combination of offence and defence."

Of course, most people do add 'good debt' onto their balance sheet to increase their wealth over the long term, their mortgage. This kind of debt is perfectly acceptable to most of us because we know in 25 years or so once it's paid in full, we will own an asset that will presumably be worth more than it is today.

Furthermore, we generally take the time to figure out just how big of a mortgage we can afford.

Anderson says we need to expand that prudent approach to debt in other areas, too, such as retirement.

Too often, people rush to retire debt-free simply to have peace of mind without considering the big picture.

"People are rushing to pay down their debt, and I think we could learn a few things from what companies do," he says. "They embrace an appropriate and conservative amount of debt."

Interest rates are at record lows, so the cost of carrying debt has never been more affordable. At the same time, the stock market is performing well, with annual returns that outpace the cost of debt.

Anderson says he doesn't suggest people borrow against their homes to invest in the market. He adds borrowing to invest has its place for sophisticated investors but it's not for most people.

"I'm against doing a lump sum where you take money out against your house and invest it in a portfolio, because you get the market risk from that day forward."

That doesn't mean, however, people shouldn't consider focusing more on investing instead of making additional payments on the mortgage.

Taking a slower road to debt freedom, while diverting cash flow to investments, may be a better path -- as long as the debt carries a low interest rate.

"If you have consumer debt at eight per cent or more, then you want to pay that, but if you have some debts as low at two to five per cent that are longer-term and structural, perhaps in the form of a mortgage, might it not make sense, instead of rushing down to pay that off, to build up a reserve -- an investment portfolio that's running a combination of offence and defence, preparing for a range of outcomes?"

Anderson says he isn't suggesting investing in the stock market per se, especially when stocks are high.

"That's just one asset class to invest; there are many options, so the question is, are there any asset investments on the planet that can get a rate of return on average over the next five years higher than your cost of debt?"

And this is a point individuals nearing retirement should be asking, rather than running full out to be mortgage-free before retirement.

"We have all these boomers rushing to pay down debt but they're also under-saving for retirement," he says. "If I'm under-saving for retirement and rushing to pay off my three per cent debt, you don't have to be a math genius to say 'Hey, this isn't going to work out.' "

Republished from the Winnipeg Free Press print edition December 14, 2013 B12


Updated on Saturday, December 14, 2013 at 1:57 PM CST: Fixes typo

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