The Value of Debt in Building Wealth

Chapter 1The Traditional Glide Path

“It does take great maturity to understand that the opinion we are arguing for is merely the hypothesis we favor, necessarily imperfect, probably transitory, which only very limited minds can declare to be a certainty or a truth.”

—Milan Kundera

In the traditional financial glide path, debt adds no value. It should be eliminated as fast as possible. Doing so is financially responsible, will increase security, save money, reduce stress, and put you on a better path to financial freedom. In this view, you typically hear:

• Debt is bad.
• You should be debt free when you retire.
• Debt creates anxiety, stress, and pressure.
• Having debt causes you to “waste money on interest.”
• All things equal, you would rather not have debt.
• Debt increases risk in your life.
• Being debt free is less risky than having debt.

I'm going to prove to you that this is not true. Together, we're going to rid ourselves of the anti-debt hysteria and explore a better, balanced way.

In a Perfect World, No Debt! But Our World Isn't Perfect

Debt is risky, and, in a perfect world, we would all rather avoid risk. The problem is that we do not live in a perfect world.

In their Nobel Prize–winning economic theorem, Franco Modigliani and Merton Miller hypothesize that capital structure (how much debt a company has) doesn't matter in a perfect world, but we don't live in one.¹ In our imperfect world, how much debt companies carry matters quite a bit. Companies carry debt because it works ...