WEBVTT - Using Debt to Build Wealth with Tom Anderson #637 0:00:00.120 --> 0:00:03.320 Welcome to Had the Money. I'm Joel and I am Matt, 0:00:03.320 --> 0:00:06.200 and today we're talking using debt to build wealth with 0:00:06.360 --> 0:00:29.160 Tom Anderson. That's right. So virtually all conventional wisdom out 0:00:29.200 --> 0:00:32.080 there points folks in the direction of paying off their debt, 0:00:32.200 --> 0:00:34.800 right like debt is dumb. That's the line that you'll 0:00:34.800 --> 0:00:38.000 hear after listening to the most personal finance podcast for 0:00:38.200 --> 0:00:41.479 no more than thirty seconds. It's the mantra. It's the 0:00:41.760 --> 0:00:44.879 driving force behind many money experts out there. But our 0:00:44.920 --> 0:00:48.400 guest today wants folks to take another look. He wants 0:00:48.400 --> 0:00:51.800 them to reconsider debt. And Tom Anderson he's the author 0:00:51.920 --> 0:00:54.800 of the New York Times bestseller The Value of Debt, 0:00:55.160 --> 0:00:58.480 and he's actually written multiple books on using debt in 0:00:58.560 --> 0:01:02.160 order to build wealth. But while most financial planning experts 0:01:02.160 --> 0:01:06.200 are only looking to grow assets and to decrease liabilities, 0:01:06.600 --> 0:01:10.440 Tom advocates for the strategic use of debt. And that's 0:01:10.440 --> 0:01:12.520 what we're talking about today. So Tom, thank you for 0:01:12.560 --> 0:01:14.959 joining us on the podcast. Hey, thanks, Joel and Matt. 0:01:15.000 --> 0:01:17.039 I really appreciate it's a pleasure to be hearing. We're 0:01:17.080 --> 0:01:19.240 glad to have you Tom. And the first question we 0:01:19.319 --> 0:01:21.720 ask everybody who comes on the show, We want to 0:01:21.720 --> 0:01:23.679 know kind of what they like to splurge on. Wow, 0:01:24.080 --> 0:01:27.240 they're saving and investing and thinking about their future. What 0:01:27.440 --> 0:01:28.679 is it that you like to splore? John? We call 0:01:28.720 --> 0:01:30.200 it the craft beer equivalent because Matt and I we 0:01:30.240 --> 0:01:32.039 like craft beer quite a bit. What are you literally 0:01:32.120 --> 0:01:35.360 drinking one right now? Yeah? So what's your craft beer equivalent? Tom? Wow? 0:01:36.360 --> 0:01:38.280 I like that craft beer plan. That's a good one. 0:01:38.920 --> 0:01:41.160 I would say that my splurge is a couple of 0:01:41.200 --> 0:01:45.039 years ago I started getting into sailing, and so anytime 0:01:45.040 --> 0:01:47.240 you do that, and it can be a very expensive 0:01:47.240 --> 0:01:49.160 and nice splurge, I try to keep it under control 0:01:49.200 --> 0:01:50.720 by just doing it as a share. So I'd have 0:01:50.920 --> 0:01:52.800 a boat share that we enjoy with our family a 0:01:52.800 --> 0:01:55.600 whole bunch. Oh nice. So are you paying for access 0:01:55.680 --> 0:01:58.160 or do you have an actual boat that you have 0:01:59.000 --> 0:02:01.480 some sort of equity belts up into. How does that work? Oh? 0:02:01.520 --> 0:02:03.040 It's actually a really neat program. We should do a 0:02:03.040 --> 0:02:05.160 separate show on it. I'll just give you the quick overview. 0:02:05.240 --> 0:02:10.200 So you do. There's um eight families share it and 0:02:10.320 --> 0:02:12.760 what they have is at the months in Chicagos where 0:02:12.800 --> 0:02:15.200 I live. So you have made June, July, August, and September, 0:02:15.520 --> 0:02:17.960 and each day has two spots, and you have this 0:02:18.360 --> 0:02:21.240 auction every year basically, and you allocate the shares, so 0:02:21.240 --> 0:02:23.920 you get to go out about thirty times, but you 0:02:24.120 --> 0:02:26.640 basically only have about an eighth of the expense, so 0:02:26.919 --> 0:02:28.839 it works. It's a little bit more than that. But yeah, 0:02:28.880 --> 0:02:30.639 you don't have to worry about the maintenance, and it's 0:02:31.000 --> 0:02:33.480 just a great, great, great program, and you don't have 0:02:33.560 --> 0:02:36.800 to worry about all the pain and the things about 0:02:36.840 --> 0:02:39.079 owning a boat. So yeah, that's the way to get 0:02:39.080 --> 0:02:41.160 out of the nail. Then owning a boat completely on 0:02:41.200 --> 0:02:43.560 your own and everything, all the headaches that come with 0:02:43.600 --> 0:02:45.360 that are all on you. But when you share it, 0:02:45.360 --> 0:02:47.680 it's yeah, you get to distribute that mess. Yeah. Well, 0:02:47.720 --> 0:02:50.480 I mean, even like we've got a friend out in California, 0:02:50.520 --> 0:02:52.360 and I mean when they were living out there, they 0:02:52.360 --> 0:02:55.120 were they were part of like a boating club or 0:02:55.160 --> 0:02:57.600 something like that, and they were they were spending a decent, 0:02:57.639 --> 0:02:59.840 decent amount of money. But I still got to think 0:02:59.880 --> 0:03:01.600 that you're winning one of those clubs is still a 0:03:01.680 --> 0:03:05.200 more affordable way to go out out on the water 0:03:05.360 --> 0:03:07.640 rather than actually purchasing a boat. And then having to 0:03:08.040 --> 0:03:10.200 what is it you pay for a slip that's at 0:03:10.200 --> 0:03:12.920 the right term, I don't know. Yeah, but there are 0:03:12.960 --> 0:03:15.240 all those expenses associated with it. But that's really cool, 0:03:15.400 --> 0:03:17.800 uh and I guess with you being Yeah, in Chicago, 0:03:17.840 --> 0:03:19.440 there makes a lot of sense to get out on 0:03:19.480 --> 0:03:21.600 that lake. Yeah, it's a short season. And the nice 0:03:21.600 --> 0:03:24.120 thing is, I mean the average user only gets uses 0:03:24.200 --> 0:03:26.720 seventy percent of their spots, so I mean it's a 0:03:26.760 --> 0:03:28.520 lot to get out there twenty times and you get 0:03:28.560 --> 0:03:31.200 thirty spots and the remaining open spots you can end 0:03:31.240 --> 0:03:33.239 up using and they kind of go into a lottery system. 0:03:33.320 --> 0:03:35.560 So yeah, it's it's great. I can't imagine who'd get 0:03:35.560 --> 0:03:38.640 out more than that. Nice All right, Well, let's shift 0:03:38.640 --> 0:03:41.400 gears and instead of talking about boating, let's talk about debts. 0:03:42.440 --> 0:03:45.680 Like generally, yeah, you talk about just how debt, how 0:03:45.720 --> 0:03:49.200 it gets a bad rap. It seems like anti debt hysteria. 0:03:49.200 --> 0:03:51.560 It seems like it's running rampant, and on its face 0:03:51.600 --> 0:03:53.280 it kind of sounds like an odd take. But why 0:03:53.960 --> 0:03:57.760 is debt so often misunderstood? I think debt is so 0:03:57.800 --> 0:04:01.119 often misunderstood because a lot of people have a bad 0:04:01.160 --> 0:04:04.000 experience with it, and there's a lot of bad debt 0:04:04.040 --> 0:04:06.480 that's out there. So first of all, it is absolutely 0:04:06.520 --> 0:04:10.600 not my view that all debt is good debt. Essentially, 0:04:10.640 --> 0:04:12.720 I think there's some debt that's good debt and some 0:04:12.760 --> 0:04:15.960 debt that's bad debt, and debt that's good debt should 0:04:16.000 --> 0:04:19.440 be evaluated thoughtfully, and debt that's bad debt should be eliminated. 0:04:19.480 --> 0:04:22.880 It's it's really about that simple. Yeah, So this is 0:04:22.880 --> 0:04:25.640 going to be a nuanced conversation here, which I'm glad. 0:04:25.880 --> 0:04:28.080 I think what Matt alluded to in the intro when 0:04:28.080 --> 0:04:29.839 he said that a lot of people say debt is dumb, 0:04:30.320 --> 0:04:34.040 that is not nuanced, right. That is one particular take 0:04:34.200 --> 0:04:37.560 that tries to say that debt is a nail and 0:04:37.560 --> 0:04:40.240 it should be pounded, you know, anytime like that. It's 0:04:40.279 --> 0:04:42.000 really just like a one size fits all kind of 0:04:42.000 --> 0:04:44.279 way of viewing the world. But you're also, yeah, you're 0:04:44.279 --> 0:04:48.000 not talking about taking on debt to spend lavishly through 0:04:48.000 --> 0:04:50.760 out there and by ridiculous things that you can actually afford. 0:04:50.800 --> 0:04:53.640 You're talking about taking calculated risks, right, very much. So 0:04:53.760 --> 0:04:56.440 this is absolutely not about buying things that you can't afford. 0:04:56.520 --> 0:05:00.839 So this is just about making strategic decisions with when 0:05:00.880 --> 0:05:02.880 you should be using low cost debt and when you 0:05:02.920 --> 0:05:05.520 should be choosing to pay down that debt versus when 0:05:05.520 --> 0:05:08.080 you should be choosing to emphasize things like liquidity and 0:05:08.120 --> 0:05:11.320 flexibility and just building up your savings. And we're gonna 0:05:11.520 --> 0:05:13.679 get to all of that. But so as a quick example, 0:05:13.800 --> 0:05:17.280 like skipping retirement contributions, I've oftentimes we're faced with a 0:05:17.400 --> 0:05:19.040 question here on the show where folks are like, do 0:05:19.080 --> 0:05:23.719 I pause my retirement investing in order to pay down debt? 0:05:23.720 --> 0:05:26.320 Do I take money out of my retirement accounts in 0:05:26.360 --> 0:05:28.479 order to pay down this debt? That's often a question 0:05:28.520 --> 0:05:31.280 that folks are wrestling. We literally had a listener recently, 0:05:31.279 --> 0:05:33.400 Tom who said, Hey, I've got a sixteen percent debt, 0:05:33.480 --> 0:05:35.679 but should I take my contributions out of my rothira 0:05:35.800 --> 0:05:36.960 to pay it off? These are the kind of questions 0:05:36.960 --> 0:05:39.520 that we're getting regularly. Yeah, it's it's one of those options. 0:05:39.560 --> 0:05:42.359 But you often will say that folks are being short 0:05:42.480 --> 0:05:45.920 sighted if they skip out on those retirement contributions in 0:05:46.000 --> 0:05:49.039 order to pay down some of that debt. How might 0:05:49.120 --> 0:05:52.279 that actually end up happening. Yeah, so let's lean into 0:05:52.560 --> 0:05:55.120 that listener had asked and kind of think about that 0:05:55.200 --> 0:05:58.240 question just a little bit. So first of all, let's 0:05:58.279 --> 0:06:00.400 say that let's just go to the extreme, because I 0:06:00.400 --> 0:06:02.160 think we can set the table with an example that 0:06:02.200 --> 0:06:04.359 we would all agree. Let's say that you are in 0:06:04.360 --> 0:06:07.520 the fortunate position that you got a mortgage when rates 0:06:07.520 --> 0:06:10.440 were really low, and your mortgage is let's say three percent, 0:06:10.960 --> 0:06:14.280 and let's just say that it's tax deductible, and today 0:06:14.360 --> 0:06:16.800 there are bank accounts that in your checking account you 0:06:16.800 --> 0:06:21.080 can earn you about three to four percent. So if 0:06:21.120 --> 0:06:25.159 my after tax mortgage is about two percent, I think 0:06:25.160 --> 0:06:28.200 in this environment we would say, hey, I don't know 0:06:28.279 --> 0:06:30.200 that I want to rush to pay down that type 0:06:30.200 --> 0:06:33.760 of debt. Does that kind of simple example start by 0:06:33.800 --> 0:06:35.840 making sense of maybe that would be a form of 0:06:35.839 --> 0:06:37.520 debt that we wouldn't want to rush to pay down 0:06:37.839 --> 0:06:40.039 for sure? Yeah? Yeah, yeah, I mean so basically, I 0:06:40.040 --> 0:06:43.520 mean you're talking about capturing the spread here, right, And 0:06:43.560 --> 0:06:45.839 so is there I guess, is there some sort of 0:06:45.839 --> 0:06:48.320 threshold is in your mind? Is there a minimum sort 0:06:48.360 --> 0:06:50.760 of spread that you would want folks to see before 0:06:50.800 --> 0:06:53.520 they are considering something like that, or is it more 0:06:53.560 --> 0:06:56.159 on an individual basis that you want folks to consider that. 0:06:56.640 --> 0:06:59.359 This is absolutely about capturing the spread, and this is 0:06:59.360 --> 0:07:04.159 exactly where the conversation is fun to have. So, first 0:07:04.200 --> 0:07:06.760 of all, if we can start by saying, hey, some 0:07:06.920 --> 0:07:09.680 debt might be good debt, and I should be thoughtful 0:07:09.800 --> 0:07:12.240 about paying that down. And an example of that would 0:07:12.280 --> 0:07:14.240 be if I had a mortgage at two percent or 0:07:14.280 --> 0:07:18.120 a student loan at three percent, that's already then people 0:07:18.120 --> 0:07:20.240 are being thoughtful and saying, well, hey, maybe that might 0:07:20.280 --> 0:07:22.200 be a good form of debt. Let's just jump to 0:07:22.240 --> 0:07:23.640 the other end, and then we'll come in the middle, 0:07:23.640 --> 0:07:26.120 which is where your question is. If I have a 0:07:26.120 --> 0:07:29.239 credit card debt running at twenty five or thirty percent, 0:07:29.960 --> 0:07:32.360 if you pay that down, you get a guaranteed return 0:07:32.400 --> 0:07:36.040 of twenty five or thirty percent. So nothing delivers that 0:07:36.080 --> 0:07:38.960 type of return. So obviously things like credit card debt 0:07:39.040 --> 0:07:42.720 or anything over twenty percent we can very quickly agree 0:07:42.920 --> 0:07:47.080 is bad. So if we just set these field goals 0:07:47.120 --> 0:07:49.920 here essentially, of like let's say two percent is good 0:07:49.960 --> 0:07:52.880 and twenty percent is bad, we now can talk about 0:07:53.000 --> 0:07:55.960 the middle. So then I think from there the preference 0:07:56.040 --> 0:07:58.360 is to be toward the lower end. It's more likely 0:07:58.400 --> 0:08:00.440 to be good, and toward the higher end it's more 0:08:00.480 --> 0:08:03.400 likely to be bad. So you can look at this 0:08:03.560 --> 0:08:06.480 in absolute rates, or you can look at it and relative. 0:08:06.640 --> 0:08:09.520 So I like to think about it like, any debt 0:08:09.560 --> 0:08:11.480 that's over ten percent, if I kind of call that 0:08:11.600 --> 0:08:14.800 the midpoint, is going to be more toward the bad category. 0:08:14.920 --> 0:08:17.880 So that's going to be most forms of consumer debt. 0:08:18.080 --> 0:08:19.920 But any debt that's going to be kind of under 0:08:19.960 --> 0:08:23.040 the seven percent range, I think it's going to be 0:08:23.080 --> 0:08:26.160 more toward the potentially good category. So that might be 0:08:26.200 --> 0:08:28.840 things like mortgages, it might be things like student debt. 0:08:29.240 --> 0:08:31.560 And between seven and ten really depends and is a 0:08:31.640 --> 0:08:34.400 little bit more personal, but I think it can require 0:08:34.400 --> 0:08:37.120 a little bit more analysis, and it's a fun area 0:08:37.200 --> 0:08:39.800 to talk about. Yeah, And one of the things you 0:08:40.280 --> 0:08:43.320 just talked about kind of with mortgages, it's not just 0:08:43.360 --> 0:08:46.760 the interest rait that you're paying, but there's also potential 0:08:46.920 --> 0:08:49.800 tax benefits, so you get from holding onto that mortgage. 0:08:49.840 --> 0:08:52.720 And I think you've said that it's a mathematical fact 0:08:53.000 --> 0:08:55.840 that debt can increase or turns and reduce taxes, which 0:08:56.080 --> 0:08:58.680 is a bold statement, but you're definitely right on the 0:08:58.679 --> 0:09:01.680 reducing taxes part. But yeah, is that a big part 0:09:01.679 --> 0:09:03.800 of the reason to consider holding onto debt as part 0:09:03.800 --> 0:09:07.120 of kind of your overall money strategy. Yeah, and a 0:09:07.160 --> 0:09:10.040 lot of tax things have changed recently, and you know, 0:09:10.120 --> 0:09:12.240 the original book came out ten years ago, but there 0:09:12.280 --> 0:09:16.360 always are different tax benefits, and well that's a part 0:09:16.400 --> 0:09:19.080 of it. I think you can almost even set the 0:09:19.120 --> 0:09:22.720 tax part aside and call that like kind of gravy 0:09:22.760 --> 0:09:26.679 and say, look, if on average, if your investments can 0:09:26.720 --> 0:09:29.480 earn you know, forget ten percent, let's just say they 0:09:29.480 --> 0:09:31.960 earn eight percent, and let's just say that your debt 0:09:32.040 --> 0:09:36.240 cost you know, six percent, then you're capturing a spread 0:09:36.240 --> 0:09:39.760 of two percent, and that can add up to thousands 0:09:39.800 --> 0:09:41.800 and thousands of dollars a year, can add up to 0:09:41.960 --> 0:09:45.480 hundreds of thousands of dollars over a lifetime. Right. So 0:09:45.720 --> 0:09:47.960 it's like a very high level sort of view here 0:09:48.640 --> 0:09:50.640 anytime you approach debt, like there obviously have to be 0:09:50.679 --> 0:09:54.240 seen guardrails in place, right, And so I'm talking for 0:09:54.480 --> 0:09:59.119 about about your your five tenets of a strategic debt philosophy. 0:10:00.120 --> 0:10:03.280 You kind of share what those tenants are, the kind 0:10:03.320 --> 0:10:04.839 of explain how it is that we could use those 0:10:04.880 --> 0:10:07.840 tenants to implement some debt in our life in order 0:10:07.840 --> 0:10:11.400 to build wealth more quickly. Yeah, So I think the 0:10:12.440 --> 0:10:14.880 first thing is is that you really just want to 0:10:14.880 --> 0:10:19.480 be thoughtful about what applies to you, and so you 0:10:19.520 --> 0:10:23.960 want to start by taking a holistic view and looking 0:10:24.000 --> 0:10:27.600 at the big picture. So that's where it starts. So 0:10:27.760 --> 0:10:31.600 when you're thinking about these different pieces, you want to 0:10:31.640 --> 0:10:34.520 start with the big picture. What are the things that 0:10:34.559 --> 0:10:37.760 I'm trying to accomplish. So this is a part of 0:10:37.920 --> 0:10:41.000 a broader philosophy. And so the first thing is that 0:10:41.040 --> 0:10:43.560 we want to be looking in a big picture sense, 0:10:43.600 --> 0:10:45.199 and I think that what that means is you want 0:10:45.200 --> 0:10:47.400 to be looking across kind of your complete financial plan. 0:10:48.240 --> 0:10:51.560 So the next part of this next tenant is to say, like, 0:10:51.640 --> 0:10:54.040 once you're looking at the big picture, to explore thinking 0:10:54.080 --> 0:10:57.679 and acting like a company. So when you think about it, 0:10:57.679 --> 0:11:00.520 companies have a CFO, and what a CFO is They 0:11:00.559 --> 0:11:04.120 actually design the balance sheet of a company. They choose 0:11:04.160 --> 0:11:06.040 how much debt that should have and how it should 0:11:06.040 --> 0:11:07.960 be structured. So if you think about a company that 0:11:08.000 --> 0:11:11.040 you like or admire, like an Apple or a Google, 0:11:11.120 --> 0:11:14.800 they have debt which they choose to have because of 0:11:14.800 --> 0:11:18.440 the liquidity, the flexibility and the tax benefits associated with 0:11:18.480 --> 0:11:21.040 that debt. They could choose to not have it, but 0:11:21.080 --> 0:11:23.319 they actually choose to have it. We'll kind of explore 0:11:23.400 --> 0:11:25.840 that a little bit more. But it's an interesting thing 0:11:25.840 --> 0:11:28.920 where I think we can learn not that we are companies, 0:11:28.920 --> 0:11:31.000 but we can learn from the ideas that they're doing. 0:11:31.280 --> 0:11:33.880 Does that make sense? Yeah, well, I mean, just to 0:11:33.880 --> 0:11:35.800 interject real quick, you said that we're not companies, but 0:11:36.120 --> 0:11:38.680 I should be thinking of myself as like the CFO 0:11:39.360 --> 0:11:41.880 of my own finances, And I like what you said 0:11:41.920 --> 0:11:45.079 as far as the debt that companies take on. It's 0:11:45.080 --> 0:11:47.520 an intentional decision, right, Like, like you said that they're 0:11:47.559 --> 0:11:50.400 designing that, and unfortunately, oftentimes in our lives when we 0:11:50.520 --> 0:11:52.760 enter into debt, we're not doing it on purpose. It's 0:11:52.800 --> 0:11:56.160 something that we're sort of we're being sold quite literally goods, 0:11:56.400 --> 0:11:58.520 and it's something that we're more or less falling into 0:11:58.559 --> 0:12:03.200 as opposed to strategically choosing on purpose. Yeah. Yeah, yeah, 0:12:03.240 --> 0:12:05.800 it's actually lean into what you're talking about just a 0:12:05.840 --> 0:12:07.760 little bit. See, if I'm a company and I don't 0:12:07.800 --> 0:12:10.520 have the right debt ratio, then someone like a carl 0:12:10.679 --> 0:12:12.480 Icon gets crabby with me and they come in and 0:12:12.520 --> 0:12:15.320 they buy me and they lever me appropriately. Right, So 0:12:15.520 --> 0:12:19.000 all companies have this like pressure by shareholders to kind 0:12:19.040 --> 0:12:22.680 of have the right type of a debt philosophy. But 0:12:23.240 --> 0:12:26.000 people tend to either have way too much debt or 0:12:26.040 --> 0:12:29.280 they're completely debt averse. And I think that there's this 0:12:29.400 --> 0:12:32.880 optimal middle ground where very few people actually happen to 0:12:32.920 --> 0:12:35.480 be and those that are actually are there by luck 0:12:35.600 --> 0:12:38.400 more than a strategic choice. We just start out with 0:12:38.559 --> 0:12:40.720 way too much debt and then we go to way 0:12:40.760 --> 0:12:43.320 too little, and I think there's this balanced ground that's 0:12:43.320 --> 0:12:46.319 somewhere in the middle. Yeah. Yeah. You also you talk 0:12:46.360 --> 0:12:49.360 about being open minded and then verifying what works, And 0:12:49.400 --> 0:12:51.560 I think that being open minded is probably really important 0:12:51.559 --> 0:12:54.040 because Matt and I we sometimes find ourselves in this 0:12:54.080 --> 0:12:56.800 interesting place as personal finance podcasters where we talk about 0:12:56.920 --> 0:12:59.120 using debt strategically and we talk about the differences of 0:12:59.160 --> 0:13:02.080 good debt and bad and we'll get pushed back sometimes 0:13:02.200 --> 0:13:04.319 from the anti debt community and they're like, no, no no, no, no, 0:13:04.360 --> 0:13:07.760 all debt is bad. But the reality, especially when you're 0:13:07.760 --> 0:13:10.640 talking about the mortgage rates. That's the perfect example right now. 0:13:10.640 --> 0:13:12.120 There's a lot of our listeners who have locked in 0:13:12.160 --> 0:13:14.520 low mortgage rates of two and a half to three percent. 0:13:15.000 --> 0:13:17.280 Three and a half percent maybe right, and now when 0:13:17.280 --> 0:13:19.079 you can make more in a savings account like it, 0:13:19.200 --> 0:13:21.439 just you have to be open minded and be willing 0:13:21.480 --> 0:13:24.280 to change your trajectory a little bit based on kind 0:13:24.280 --> 0:13:26.520 of what's happening right now. But one of the things 0:13:26.600 --> 0:13:30.439 you talk about is the optimal debt ratio, and I 0:13:30.520 --> 0:13:32.720 think that's probably something worth kind of drilling down on 0:13:32.720 --> 0:13:35.120 a little bit, because it's obviously, like you said, some 0:13:35.160 --> 0:13:37.360 people have way too much debt. Some people have no 0:13:37.480 --> 0:13:39.400 debt at all. But yeah, talk to us about the 0:13:39.400 --> 0:13:41.280 optimal debt ratio and how we kind of figure out 0:13:41.320 --> 0:13:44.880 what that is in our lives. Yeah, So the optimal 0:13:44.920 --> 0:13:48.560 debt ratio is how much you're borrowing against the assets 0:13:48.600 --> 0:13:52.000 that you have. And so if I am, you know, 0:13:52.320 --> 0:13:55.600 buying a TV on a credit card, then a year 0:13:55.679 --> 0:13:58.520 from now, my TV is worth less and my credit 0:13:58.559 --> 0:14:00.839 card debt went from let's say it was a two 0:14:00.840 --> 0:14:03.200 thousand dollars TV, if I didn't make payments on it, 0:14:03.200 --> 0:14:06.240 that's I know, twenty four hundred dollars. What is worth 0:14:06.240 --> 0:14:09.040 a fifteen hundred dollars TV, and then my debt ratio 0:14:09.040 --> 0:14:12.439 would be upside down because I own more than I owe, 0:14:12.559 --> 0:14:14.360 and so that would be an example of a bad 0:14:14.440 --> 0:14:18.880 debt ratio, right, And that makes sense. The other side 0:14:18.880 --> 0:14:20.760 of this is, let's say that you own something like 0:14:20.840 --> 0:14:23.920 a house, which you know certainly can go down in value, 0:14:23.920 --> 0:14:26.600 but maybe over a long period of time, like ten 0:14:26.680 --> 0:14:29.760 or twenty years, might tend to go up in value 0:14:29.760 --> 0:14:32.840 a little bit over time. Then you want to think about, well, 0:14:33.120 --> 0:14:36.720 if this asset is going up in value over time, 0:14:37.240 --> 0:14:40.040 even if I keep my debt relatively the same, it's 0:14:40.080 --> 0:14:43.440 actually gradually falling. So if you even just make the 0:14:43.480 --> 0:14:46.400 base payments on your student loan or to just make 0:14:46.400 --> 0:14:49.400 the base payment on your mortgage, but that house is 0:14:49.440 --> 0:14:53.560 going up, your debt ratio is actually drifting down. And 0:14:53.680 --> 0:14:55.800 so companies look at this a lot. And what I 0:14:55.880 --> 0:14:57.920 like to kind of explore as a debt ratio of 0:14:57.960 --> 0:15:01.360 around thirty percent, And that's where people tend to have 0:15:01.480 --> 0:15:03.840 way more debt than that or way less debt than that. 0:15:03.920 --> 0:15:06.560 But it's a fun place to start the conversation. I 0:15:06.600 --> 0:15:10.200 think the maybe how it does we define debt, I 0:15:10.240 --> 0:15:12.440 think that can go a long ways and helping us 0:15:12.480 --> 0:15:15.920 to determine whether or not certain debts in our lives 0:15:16.040 --> 0:15:18.640 might be helpful, you know, how they might be able 0:15:18.680 --> 0:15:21.000 to help out our bottom line or not. We'll get 0:15:21.040 --> 0:15:23.600 to some of those different definitions, and we'll kind of 0:15:23.640 --> 0:15:25.640 talk about liquidity as well. We'll get to all of 0:15:25.680 --> 0:15:37.120 that right after this. All right, we're back from the break. 0:15:37.160 --> 0:15:39.880 We're still talking about using debt to build wealth. We're 0:15:39.880 --> 0:15:43.840 to have this conversation with Tom Anderson. And Tom, you 0:15:43.960 --> 0:15:48.600 have different debt definitions basically, and like I alluded to, 0:15:48.680 --> 0:15:50.320 Matt and I we talked about the kind of good 0:15:50.320 --> 0:15:53.720 debt versus bad debt, strategic debt versus debt that's gonna 0:15:54.120 --> 0:15:56.160 leave you kind of by the side of the road, 0:15:56.800 --> 0:16:00.120 bleeding and hurt. But you're clearly you're not talking about 0:16:00.160 --> 0:16:01.480 card debt is something that we should hold on to. 0:16:01.920 --> 0:16:04.520 But you have three different, like working definitions. Can you 0:16:04.760 --> 0:16:08.360 define them their oppressive debt, working debt, and enriching debt. 0:16:08.400 --> 0:16:10.840 I'm curious to hear kind of yeah, what those are 0:16:10.840 --> 0:16:14.800 for you. Yeah, So oppressive debt is where I just 0:16:14.800 --> 0:16:17.040 want to make sure that everybody on this call is 0:16:17.080 --> 0:16:20.880 completely aligned and that all of your listeners know things 0:16:20.920 --> 0:16:24.560 like credit card debt, debt that costs in my world 0:16:24.600 --> 0:16:26.880 more than ten percent, and clearly debt that costs more 0:16:26.920 --> 0:16:30.480 than twenty percent is oppressive debt. It is bad debt. 0:16:30.560 --> 0:16:32.760 And all of the conventional wisdom that you hear on 0:16:32.880 --> 0:16:36.680 debt is correct with respect to oppressive debt. It just 0:16:36.720 --> 0:16:39.000 puts you in a cycle that is difficult to break. 0:16:39.120 --> 0:16:42.560 If you're buying things that you can't afford, you never 0:16:42.640 --> 0:16:45.600 break through. And I think that a very solid fifty 0:16:45.600 --> 0:16:49.680 percent of America gets trapped by oppressive debt, perhaps benefits 0:16:49.680 --> 0:16:52.280 from conventional wisdom, and I just want to hit the 0:16:52.280 --> 0:16:56.720 table and scream, like oppressive debt is terrible. So working 0:16:56.720 --> 0:16:59.840 debt and enriching debt what are those for us? Then? 0:17:00.160 --> 0:17:02.280 So working debt is going to be things that we're 0:17:02.320 --> 0:17:05.000 talking about, like a mortgage. It's going to be lower cost, 0:17:05.200 --> 0:17:07.479 maybe a low cost car loan, which is not going 0:17:07.520 --> 0:17:09.720 to be a bad thing to buy a car rather 0:17:09.760 --> 0:17:12.200 than buying a car with cash. There could be reasons 0:17:12.240 --> 0:17:14.639 to use a low cost car loan rather than paying 0:17:14.680 --> 0:17:17.520 for your student, your school and cash. There can be 0:17:17.600 --> 0:17:21.040 a reason to have a school loan, or you're buying 0:17:21.080 --> 0:17:23.679 an asset that you're going to pay for over time 0:17:23.800 --> 0:17:26.480 or earn more money over time, that's going to have 0:17:26.520 --> 0:17:29.320 a lower rate associated with it, a rate that's typically 0:17:29.760 --> 0:17:32.600 you know, in the load of mid single digits. Those 0:17:32.640 --> 0:17:34.600 can be examples of good debt that should be a 0:17:34.600 --> 0:17:37.399 thought of much more carefully and can potentially add value 0:17:37.400 --> 0:17:40.280 to you in your life. That's working debt. And then 0:17:40.320 --> 0:17:42.920 the last type of debt you mentioned is enriching debt. Yeah, 0:17:42.920 --> 0:17:45.000 some people would say that's an oxymoron, So I'm curious 0:17:45.000 --> 0:17:47.360 to hear how you talk about that. The interesting thing 0:17:47.480 --> 0:17:51.199 is that when you think about billionaires, what percentage of 0:17:51.200 --> 0:17:53.840 them do you think borrow money? Oh? Most of them, 0:17:53.920 --> 0:17:57.440 all of them, virtually all of them, So that's interesting. 0:17:57.480 --> 0:17:59.359 Most of them and all of them. So we don't 0:17:59.400 --> 0:18:02.600 have great but it's approximately seventy percent of them is 0:18:02.640 --> 0:18:06.320 the best that can be discerned, but with trends toward higher, 0:18:07.680 --> 0:18:10.560 but it is very clear that the vast majority do 0:18:10.720 --> 0:18:14.280 borrow money. So why if you're a billionaire would you 0:18:14.359 --> 0:18:16.560 choose to borrow money, because of course you could choose 0:18:16.560 --> 0:18:19.760 to not have debt. So why are we seeing the 0:18:19.840 --> 0:18:23.800 affluent people in America the one percent that could choose 0:18:23.800 --> 0:18:26.439 to not have debt. Why do you think that they 0:18:26.520 --> 0:18:29.120 choose to have debt so they don't have to sell 0:18:29.160 --> 0:18:32.960 their assets and pay taxes on those gains. That's absolutely 0:18:33.000 --> 0:18:34.800 one reason that they do it is so they don't 0:18:34.800 --> 0:18:36.720 have to sell assets so that they don't have to 0:18:36.720 --> 0:18:39.480 pay taxes on the gains. But sometimes if you see, 0:18:39.560 --> 0:18:43.119 like you know, Elon Musk has many different businesses, but 0:18:43.160 --> 0:18:45.320 then he's sitting around and he's like, hey, I'd like 0:18:45.440 --> 0:18:49.320 to buy Twitter. So he wanted to fund that acquisition 0:18:49.440 --> 0:18:52.040 with debt by not selling his other assets, and so 0:18:52.080 --> 0:18:55.120 then he's constantly building up more assets. And you see 0:18:55.119 --> 0:18:58.840 this across the high net worth spectrum. These are enriching 0:18:58.880 --> 0:19:01.680 debt is when you could choose to pay cash for something, 0:19:02.280 --> 0:19:04.720 or you could choose to sell an asset for something, 0:19:05.080 --> 0:19:07.880 but you are making a strategic choice to use debt 0:19:07.960 --> 0:19:10.840 as a tool to buy it instead. You see that 0:19:11.200 --> 0:19:13.280 all the time and the high net worth market and 0:19:13.280 --> 0:19:15.000 the ultra high net worth market, and it is a 0:19:15.040 --> 0:19:18.400 strategy that the rest of America can learn from. So 0:19:19.000 --> 0:19:22.160 why don't they? So my question is obviously paying cash 0:19:22.160 --> 0:19:24.800 for everything, not taking on additional debt like that is 0:19:24.840 --> 0:19:27.560 going to be a more straightforward and simple path to take. 0:19:27.680 --> 0:19:29.560 Is that the main reason is that why it is 0:19:29.600 --> 0:19:32.520 that folks tend to think, all right, I'm just going 0:19:32.560 --> 0:19:34.439 to focus on paying off my mortgage. I'm just going 0:19:34.480 --> 0:19:37.240 to focus on completely eliminating all forms of debt that 0:19:37.280 --> 0:19:40.440