The Value of Debt in Building Wealth

Chapter 5The Other Side of the Balance Sheet

“Debt is part of the human condition.”

—Margaret Atwood

Debt is neither good nor bad. It is simply a magnifier. If you choose investments that deliver higher returns than the after-tax cost of your debt, then debt adds value. If you choose investments that return less than the after-tax cost of your debt, then debt destroys value. For example, if you borrow money at 3 percent and invest in assets that return 6 percent, debt added value. If you borrow money at 6 percent and buy assets that pay 3 percent, then debt destroyed value.

The goal is to capture the spread over time. By that I mean we want to earn a rate of return higher than your after-tax cost of debt. What follows are the ideas that influence me in trying to capture the spread. These ideas are unique because I know I do not know the future whereas, from what I see on TV, a lot of people seem to think they do. You can listen to your fortune teller, get a crystal ball, turn on the TV, and follow the lemmings or you can use the following facts—grounded in math and Nobel Prize–winning theories—to fundamentally shift your strategies and develop a comprehensive, holistic philosophy that transcends both sides of the balance sheet.

In order for me to prove The Value of Debt in Building Wealth, I have to spend time talking about the other side of the balance sheet—assets. When people hear my Value of Debt platform, they think it is a bull market strategy. Make no mistake about it: ...