The Value of Debt in Building Wealth Summary, Review PDF

A practical guide to managing your personal finances, The Value of Debt in Building Wealth explains the value of debt. 

This handbook presents strategies to make debt into its own asset rather than condemning spending.

You may be wondering if you should read the book. This book summary will tell you what important lessons you can learn from this book so you can decide if it is worth your time.

At the end of this book summary, I’ll also tell you the best way to get rich by reading and writing

Without further ado, let’s get started. 

The Value of Debt in Building Wealth Book Summary

Lesson 1: Stay away from risky debt, build up savings, and make wise investments.

If the world of finance were an ocean, you would be the captain. As the captain, it’s in your best interest to set a course that leads to financial stability. But how do you go about doing that?

You never know. Just as no two routes are alike, no two charts are alike. But here are some guidelines that can help. To avoid rocky shoals, you’ll need a compass and a lighthouse.

You can use these guidelines as a starting point for your personal financial journey. Keep them in mind, and you’ll be safe.

To help you prepare for your financial future, I have put together some suggestions below. Please note that not all debt is the same. Some may help you, while others may limit you.

Obscure debts include payday loans and credit card balances. They usually carry high interest rates and are not tax deductible. Try to stay away from them if you can!

On the other hand, enriching debts have low interest rates and are tax deductible. Mortgages and small business loans are two examples you can keep to increase your cash flow.

What exactly is meant by “cash flow”? It is the same as cold, hard cash and can be used immediately. Having access to cash provides more freedom to act. Sometimes life is very difficult. A medical emergency or losing your job are two possibilities. With the money you have saved, you can get through these difficult times.

A good example of how this can help is if you are unemployed and looking for work. Building a cash reserve is smart.

Not only should you set aside money, but you should also think ahead. Set up your 401(k), mutual funds and savings accounts. The earlier you invest in these financial instruments, the more your money will grow because of the compound interest effect. In 30 years, you’ll have nearly $4 million if you set aside $15,000 a year at 6% interest. Wow, that’s a huge amount of money!

Everyone’s financial situation is unique, so the allocation of funds will vary. It is recommended that you set aside between fifteen and twenty percent of your income each month.

Although it is wise to save as much as possible, it is also important to reward yourself occasionally. If life is a journey, then ideally that journey should be fun.

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Lesson 2: Systematically investing money can serve as a springboard to prosperous financial LIFE.

Playing retro video games is a popular pastime in arcades. It does not matter if you play Pac-Man, Tetris or Frogger. A quarter resets any machine to level one. You steadily work your way through the levels.

This also applies to a trip that does not completely empty your bank account. There are four different levels that must be reached in order to advance. The term “financial LIFE cycle” is commonly used to describe these stages.

Start is the first stage, followed by independence, freedom and finally balance.

How do you progress through each phase? In video games, you progress by raising the required statistics to the next level.

How much money you have tells you what financial status you are in. To calculate your net worth, add up your liquid assets (bank balances and real estate) and subtract your debts (mortgages, loans, and taxes).

You are in start-up status if your assets are less than one year’s income. If your assets are greater than your liabilities, you should be commended. Now that you have reached the first phase of independence, you can move on to the second phase.

Below you will get insights into the last two phases. For now, we will focus on the journey from startup to freedom. There are a few things you need to do first. First, you need to pay off all outstanding credit card balances.

Next, start putting money aside to increase your financial flexibility. A month’s worth of living expenses should always be in your bank account. Then put the equivalent of one month’s salary into a retirement account.

You can achieve your goals with the help of a systematic strategy and some math. Write down the current balances of all your accounts.

Then determine how far you are from your goal. Do not stress if you do not know how to finish the sentence. All you need to do is adjust your regular spending. Write down what you want to accomplish in the next three to five years. Then move on to step two.

In the independence phase, the strategy will remain the same, but the goals will change. Six months of income and three months of liquid assets should be saved for retirement.

Establishing a third account makes sense if you want to start a family or buy a house. At least nine months’ salary should be deposited into this account. This way, you will be ready for the next stage after just a few years.

Lesson 3: Save money and time to become financially independent.

Meet Brandon and Teresa, a Chicago couple living in the Loop. They have been responsible with their money for the past ten years. They set aside some money each month and keep adding to it to save for future goals and life changes. Congratulations, Brandon and Teresa! They have completed the first two phases of LIFE.

Phases three and four are called freedom and balance, respectively. In this regard, things change slightly. Instead of focusing on your monthly income, these phases look at your overall debt-to-asset ratio. The debt to asset ratio shows how much debt you have compared to your assets.

Consequently, Brandon and Teresa want to reach their goal by reducing their debt load and saving as much money as possible for their retirement.

When you enter the third phase, your financial foundation is set. If you save diligently and set aside money each year, you can grow your assets to the equivalent of five years of your annual income. When you have such a stockpile, you can handle any unexpected expenses with ease. It will not be long now, even if retirement is still 20 years away.

Once you reach the Freedom stage, focus on building your wealth. To do this, you need to lower your debt-to-income ratio to a reasonable level. What is an acceptable debt-to-income ratio?

Initial ratios hover around 65%, which is due to low income and high mortgages. A $200,000 mortgage would leave the couple with $300,000. By the end of stages three and four, this should have increased to 35-40%.

What path would you recommend if you had a limited window of opportunity? Not in terms of paying off debt. They would be better served putting their money into long-term savings and retirement accounts. In the long run, these funds will increase in value thanks to compound interest.

Even with a moderate rate of return, they could be worth $500,000 in a few years. That still leaves them with a manageable 40% ratio, even after the initial debt. Actually, that’s not so bad.

That percentage will go down as your assets grow. Paying off debt is a breeze if you have a substantial nest egg.

Eventually, when everything has come into balance, the process is complete. Taking on debt is a decision you can make at that time. There is no downside to keeping or paying off the balance. It turns out that Brandon and Teresa can retire much sooner than they expected.

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Lesson 4: A diversified portfolio can help you fight debt.

It’s completely dark in here. A strong scent of incense permeates the room. A mysterious woman with a crystal ball in front of her faces you. The ball buzzes and lights up. Suddenly she exclaims, “Commodity yields in the United States will increase by 9%.”

This is as ridiculous as it sounds. Even if they had access to divine oracles or a plethora of divination talents, the financial markets would still be unpredictable. Any fool or liar believes they actually can.

On the other hand, investing need not be completely random. Simple strategies often deliver the best results when it comes to generating reliable returns from a portfolio.

To make borrowing money worthwhile, your investments must yield more than the interest you pay on your debt. The value of your holdings will increase if your interest rate is 3% and the return on your debt is 6%. The goal of every investor should be to “earn the spread.”

What is the best way to gather information about the spread? The best way to identify profitable investments is to pay close attention to economic and financial news. Between 1970 and 2015, the market has grown at an average annual rate of 10%, outpacing the growth of most debt.

While this is a good approximation, it is not a guarantee. It is possible for stock prices to fluctuate wildly from one security to another. You’ll be in big trouble if your picks go bust just when you need them to.

Therefore, it is better to have a diversified investment strategy. Therefore, it is important that you diversify your portfolio by investing in different types of assets.

For example, you could diversify your portfolio by investing some of your funds in the United States stock market, some in real estate, some in foreign government bonds, and some in other investment options.

In this way, you reduce individual risk and increase overall security. Even if the value of one investment goes down, another is likely to go up. Previous research has shown that 92% of the variance can be covered by this technique.

You can expand the diversification of your portfolio if your investment capital is larger. A well-diversified portfolio usually consists of three types of investments. The conservative, low-return option, the intermediate portfolio, and the high-risk, high-return option.

No matter how prudently you plan your finances, the future is never guaranteed. A plan can help you succeed even if you are already in debt.

The Value of Debt in Building Wealth Book Review

The Value of Debt in Building Wealth is a great book I’d like to recommend to anyone who is interested in business and finance. If you spend some time digesting the ideas, it might make a positive impact on your life.

Debt is something that should be avoided at all costs and paid off as quickly as possible, as common sense recommends when it comes to finances. Of course, not all debts are the same. Some types of debt, such as mortgages, can even help build wealth if you pay them off properly.

Do not put all your money into repayment. Instead of sitting on your money, use it for things that will make you more money. Your savings will grow at a healthy rate, providing you with a secure retirement and the ability to pay off your debt in full.

Homeownership is seen by many as the path to financial independence. In many cases, this is true, but renting can also be a good option. When analyzing a purchase, think about things like mortgage payments, taxes, maintenance and possible depreciation. Sometimes it makes more sense to lease than to buy.

About the Author

Thomas J. Anderson founded two financial technology companies, Supernova Technology and Anasova.

He is also the author of best-selling financial advice books such as Money Without Boundaries, The Value of Debt, and The Value of Debt in Retirement, all of which have appeared in the New York Times.

Buy The Book: The Value of Debt in Building Wealth

If you want to buy the book The Value of Debt in Building Wealth, you can get it from the following links:

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