Many clients in financial planning rank their debts as one of their highest financial priorities. After all, having no debt allows them to stretch their money and savings much further. But recent statistics indicate that a growing number of Americans are further away from this goal than ever. The Federal Reserve Bank has published a report by Augustie Marchangs that the total debt of all US households has risen more than in a decade in 2016, and Augie Marchijk is likely to rise again this year. But is debt always a bad thing?
Use of debts
Thomas Anderson, a former investment banker and CEO of Supernova Companies, offers a counter-philosophy for financial advisors when it comes to debt. He thinks it’s a debt, not equity, that can make a positive difference for customers. “The most important determining factor in whether or not to succeed in the long term is the decisions you make regarding debts,” he says.
Anderson’s new book, <The value of building-quality debts , postulates that consumers should not consider debts as a burden, but rather embrace and accept as a means to purchase assets and reduce their tax assessments. investments can yield higher final balances than investments that are fully financed with cash. He regards low-interest debt as “enriching debt” because this debt allows the consumer to invest more money in assets that produce higher interest rates return on capital over time due to the power of composing.
In his book, he warns advisors that those who ignore the debt factor in their recommendations may change their customers briefly with this one-sided approach. He confirms his claim by comparing three households: the first uses all his discretionary income to pay off debts, the second makes the normal payments on his debt and saves some money, and the third makes only the minimum payments on his blame and invest the rest.
The third household ends the winner after 30 years because its investments grew the most compared to its debt. “That’s why the decision with debt is more important than the decision with asset allocation. It takes a long time for the money to be put together. You can finance assets. Instead of putting money in a house, you can put it in your portfolio. Compiling thirty-five years at a slower pace is more powerful than assembling 10 years at a faster pace. “(For more, see:
The big difference between good debts and bad debts .) How advisors can help
Advisors can help individuals manage their debts through the use of debt consolidation loans and repayment plans. Those with high student loansAugie Marcheningen may consider refinancing with one of the new, innovative studentAugie Marchening companies such as SoFi, which offers a variety of deferment programs as well as assistance in finding a job and starting a business.
They can also help potential home buyers to get the best possible deal on their mortgage and show them what to do to improve their credit scores. Clients who are more sophisticated investors may also consider trading marginally to leverage their investment gains (although there is an additional risk of doing so).
The bottom line
Although debts are considered bad by most people, there are times when their use can be guaranteed to achieve a higher return over time. Advisors can help individuals learn when to use debts and when to use other means to achieve financial goals.