Chapter 1
The Traditional Glide Path
āIt 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.ā
āMilan 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 āwaste money on interest.ā
- 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 Prizeāwinning 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 for their bottom line even though they likely have the resources or could raise money to pay for things in cash.
People, on the other hand, do not have this luxury. Our ability to buy things is limited to our income, assets, and use of debt. No one would need debt if we could rent everything we want and need, under terms and conditions we find desirable, and at a cost equal to what it would cost to borrow money to buy. In this perfect world, most people would be neutral to renting versus buyingāand renting would often make more sense.2 You don't buy a car and house for a one-week vacation in Hawaii. You rent because the terms and conditions are much better than buying. This same concept could apply to everything in your life, but it doesn't for a combination of financial and emotional reasons.
In our imperfect world, many people use debt to buy things they could not otherwise afford with cash they have on hand, including houses, cars, education, or investing in their small business.3 As a result, manyāif not mostāpeople choose to take on debt early in life and spend their lives trying to pay it down. Is this a good strategy? Should people borrow money? If so, how much should they borrow? How fast should it be paid down? How does buying compare to the alternatives?
HOUSTONāWE HAVE A PROBLEM!
The vast majority of us use debt as a tool at some point in our lives and race to pay it off because we perceive it adds little to no value and adds stress to our lives. At the same time, most people desire to ultimately retire, yet are not on track for retirement. Is it possible that we can find balance in this tug of war between paying off debt and being on track for retirement?
A survey of college graduates who make more than $50,000 per year indicates:4
- 93 percent plan to retire by age 75 (and 86 percent before age 70).
- 85 percent of those surveyed either have debt or plan to use debt at some point in their life.
- 93 percent want to retire debt free.
- Only 27 percent think it is even possible that having debt in retirement is a good idea.
- 73 percent say that debt increases stress.
- 96 percent would choose to not have debt if they had the choice.
- 50 percent do not feel on track for retirement, and studies indicate that as many as 90 percent of Americans fail tests for meeting future retirement needs.5
You Owe a Debt to Your Future Self
Whether or not debt is bad or debt is good depends on your resources relative to your needs. If you can afford to pay cash for something, then paying cash might be a great idea. But whether or not you can afford it is just one part of a much bigger picture: If you want to retire, you owe a debt to your future self.
If you are 100 percent confident that retirement isn't an issue for you, then you have a lot of flexibility and could consider the potential benefits of paying cash for everything. However, most of us have to work and save in order to retire. I, for one, do not have enough money to retire tomorrow with the lifestyle I would like to live. For those of us in this situation, we have a dual mandateāwe need to reduce our debt and save for retirement.
If you are like me, you want to enjoy the journey along the way, too. I want to see the world and live in a house big enough to host parties. I'm happiest by a campfire and I don't need anything extravagant, but I like doing some crazy things from time to time. If we want to also enjoy life, it's actually a tri-mandate!
Around most kitchen tables, a conversation begins whenever extra money comes in (perhaps a bonus or a raise). Should we pay down debt? Should we buy that thing we've had our eye on? Should we save toward retirement? Should that savings be in our retirement plan or in our investment account? And if we invest it, what should it be invested in? Maybe we should get that new house after all.
I've studied finance my entire life. There are about a million articles telling me how to invest my money, predicting the future (and generally being wrong), and feeding me financial news 24/7. Why do I feel like we are always guessing on these important decisions? What about my debt? How much should I have, and how should it be structured? Why does everybody tell me to get rid of it? I only have so much money; if debt is bad how do I handle my tri-mandate of saving, enjoying life, and paying down debt?
So how can I be responsible, have the things I want, enjoy life, yet save toward the future, be on track to retire, reduce anxiety, and increase flexibility? I value flexibility and hate being trapped; I want freedom. Will being debt free give me freedom? Or is there another way?
Break the Paycheck-to-Paycheck Cycle
Money flows into every household like water through a hose. When all is well, it flows freely and abundantly. But a kink in the hose (loss of a job, a serious medical condition, even a natural disaster) could stop the flow. If you haven't be...
