The Value of Debt in Building Wealth

Chapter 4Freedom and Equilibrium

“There is a better way to do it—find it.”

—Thomas Edison

In his bestselling book Seven Habits of Highly Effective People, Steven Covey urges readers to begin with the end in mind.¹ He writes that we first create things in our minds. When you build a home, he points out, you make detailed blueprints before a single nail is hammered. You make sure you've thought through every detail of your dream home before you break ground. I want to think about our finances this way as well. Once you have broken through the initial phases you have a strong foundation in place. From here we can “begin with the end in mind” where we can balance the tri-mandate of enjoying life, paying down debt, and being on track for retirement. Together, we can create a blueprint for your financial goals.

Now that you have made it through the Launch and Independence phases, you are on a balanced path. You have no oppressive debt, a liquid safety net and, possibly, your first home purchased. Now we consider the next steps: Enjoying life and preparing for retirement. In the Freedom and Equilibrium phases we'll work to reduce your debt ratio and build up assets.

Phase 3: Freedom

When your net worth is less than five times your annual income, you simply do not have enough money to retire. During this phase, you want to reduce your debt ratio, save toward retirement, and enjoy life.

I want you to be able to be debt free. If you have these resources and choose to pay off your debts, ...