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The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth


Praise for The Value of Debt

"While most financial firms today are able to deliver integrated solutions, truly integrated financial advice remains a scarce commodity. With The Value of Debt, Tom Anderson takes an important, balanced, and clear step toward filling this void."
--Lyle LaMothe, Senior Partner at Left Hand Logic, LLC; former Head of Merrill Lynch U.S. Wealth Management

"There are thousands of books and articles that discuss balance sheet structure and design for corporations but virtually no one is applying an academic framework to shape the dialogue for individuals. I read The Value of Debt with fascination. Tom's ideas are simple but well grounded in theory. The book will benefit many, in particular, making debt a darling rather than a dirty word."
--Mahendra Gupta, Dean, Olin Business School, Washington University in St. Louis

"This book applies fundamental concepts from corporate finance to personal finance. Tom Anderson provides an accessible and persuasive discussion of why and how debt should be an important tool in personal financial management. The sophisticated financial reader will gain many useful ideas, and enjoy the rigorous discussion of the tradeoffs and applications of Anderson's ideas. This book represents a significant step forward for financial advisors. Highly recommended."
--Michael Gibbs, Faculty Director, Executive MBA Program; Clinical Professor of Economics, The University of Chicago Booth School of Business

"The holistic approach presented in The Value of Debt provides an assortment of tools that transcend all aspects of your personal financial life. It will challenge your preconceived notions and encourage you to approach your financial life in a more cohesive way."
--Bill King, Chief Investment Officer, Carrington Capital Management, LLC

"I found the book to be extremely readable, technically accurate as well as very provocative for those of us who are conservative in our use of debt."
--Eliot Protsch, Retired Chief Financial Officer, Alliant Energy

"Tom has written a very interesting and thought-provoking book about an area of wealth management that not many others even think about. Capturing the spread is what business is all about and creating value vs. destroying value at the end of the day is what creates earnings per share. The Value of Debt challenges the conventional wisdom that all debt is bad."
--Jim Hoffman, Chairman, YRCW

"An impressive achievement that can drive important conversations between clients and advisors."
--Stephen E. Vanourny, Global Head of Strategy, State Street Corporation

Thomas J. Anderson has an MBA from the University of Chicago and a BSBA from Washington University in St. Louis, where he majored in finance and international business. He has participated in programs at the London School of Economics, Cass Business School at City University London, ESCP Europe, and the Wharton School of the University of Pennsylvania. Tom worked in investment banking in New York before moving into private wealth management. Tom has received multiple distinctions and prominent national recognition for his wealth management accomplishments. His extensive academic studies at some of the top schools in finance and economics, international experience, and institutional background bring a unique perspective to delivering advice to the individual and on The Value of Debt.

Foreword xi

Acknowledgments xv

Introduction xvii

Part 1: The Value of Debt in the Management of Wealth 1

Chapter 1: Strategic Debt Philosophy: An Overview 3

How This Book Can Add Value to Your Life 3

The Five Tenets (or Action Principles) of Strategic Debt Philosophy 4

Chapter 1: Summary and Checklist 14

Chapter 2: The Basic Idea: Limiting the Costs, the Impacts, and the Duration of Financial Distress 21

Risk of Financial Distress 22

The Direct and Indirect Costs of Financial Distress 23

The Impact of Financial Distress: Five Levels 24

The Duration of Financial Distress 25

The Four Indebted Strengths: A First Look 26

The One Thing You Must Consider! 26

Chapter 2: Summary and Checklist 29

Chapter 3: Strategic Debt Practices: An Overview 33

Understanding and Taking Advantage of Strategic Debt Philosophy 34

Achieving and Maintaining an Optimal Debt-to-Asset Ratio 37

Calculating Your Debt-to-Asset Ratio 41

Should Your Primary Residence Be Included in Your Debt Ratio? 43

When to Pay Down Your Debt, and When Not To 45

Advanced Practices and Scenarios 47

Chapter 3: Summary and Checklist 49

Part 2: The Assets-Based Loan Facility 53

Chapter 4: The Value of an Assets-Based Loan Facility (ABLF) 55

What an ABLF Is and How It Works 56

The Many Advantages of Having an ABLF in Place 59

Why Virtually Every Company Has a Line of Credit 61

Surviving Storms and Other Natural Disasters 62

The Criticality of Being Proactive and Assessing Risks 64

Family Finances: First Bank of Mom and Dad; Elder Care Bridge Loan 67

Taking Advantage of Opportunities and Distressed Sales 68

Average ABLF Usage and the Win-Win-Win Scenario 70

Chapter 4: Summary and Checklist 71

Part 3: Scenarios for Success 75

Chapter 5: Long-Term Wealth Amplification through Capturing the Spread 77

The Basic Concept: Inherent Risks with Great Potential Rewards 77

Three Key Factors to Consider 79

Some Scenarios for Capturing the Spread 83

Synching with Your Investment Strategy 93

Chapter 5: Summary and Checklist 93

Chapter 6: Holistic Financing of the Expensive Things You Need and Want 99

A Better Way to Buy: In the Company of Holistic Financial Thinkers 99

Four Principles When Financing the Purchase of a Desired Item 100

A Better Way to Purchase a Vehicle (or Almost Anything Else) 108

Purchasing a Second Home: Pluses and Minuses 111

100 Percent Financing: The No Down Payment Real Estate Purchase Option 117

Chapter 6: Summary and Checklist 119

Chapter 7: Generating Tax-Efficient Income in Retirement or Divorce 123

Introduction: Three Goals (and Some Disclaimers) 123

An Opening Scenario for No Taxes in Retirement 124

Borrowing Versus Selling to Access Your Money 125

A Better Alternative to a Familiar Story 127

Tying It Back to Capturing the Spread 128

Revisiting Tax Issues 130

Making Use of Strategic Debt Strategies and Practices in Divorce 138

Chapter 7: Summary and Checklist 143

Chapter 8: Conclusion: What This Book Is Really About 149

What We Hope You Have Taken Away 150

Strategic Debt as a Financial Engine over the Decades 153

Paradoxes of Plenty: Some Surprises in Maintaining an Ideal Debt Ratio 158

Investing in the Future: A Cautionary Reminder 162

A Final Thought 164

Chapter 8 Summary: A Recap of the Book’s Significant Lessons 164

Part 4: Appendixes 169

Appendix A: The Varieties of Debt 171

Appendix B: Strategic Debt Practice for the Young and Those with Limited Assets 175

Appendix C: No Guarantees: Limiting the Risks of Investing in a Crazy World 185

Appendix D: Some Examples of Ideal Debt Ratios 209

Glossary 225

Bibliography 229

About the Author 231

About the Companion Website 233

Index 235