Don’t fear debt
It only takes a quick scan through the AM radio stations on any given afternoon to come across talk segments – more than one, we’d wager – coaching people on the best ways to get out of debt. Guys like Dave Ramsey disparage credit while they preach the gospel of living debt free, and on one hand they have a point. Decades of rising credit card abuse in personal, commercial and investment spaces have landed plenty of individuals in hot water.
However, while half the American populous is on a mission to scream “I’m debt free!” into their car radios, many of the world’s most successful investors – people with BILLIONS of dollars in cash and other liquid assets – still opt to carry plenty of debt on their balance sheets.
Take Apple, for instance, and I know very few of us are Apple-level, but keep reading. In 2015, Apple took on an additional $6.5 billion in debt, despite possessing hundreds of billions in cash and assets. Why not pay it outright and not take on any debt at all?
It’s because Apple knew it would make more money with the cash they have on hand in the time it would take to pay off their debt than that debt would cost in interest over the life of the loan. In English, assets and cash on hand give you wiggle room. When used properly, it’s worth taking on debt to keep as much cash on hand as possible and use it to accrue more wealth in the long run.
In the next few blog posts, we’ll explore the concept of constructive debt – leverage as we call it – and how we at Addicus can help you advance your Personal Financial Enterprise.
At Addicus, we think about wealth, worth, debt and you differently than other firms.
Most people tend to compartmentalize when we think about our finances.
Your personal goals and expenditures may exist separately from the goals and expenditures of your business, household, job, and so on. But these things all connect your Personal Financial Enterprise (PFE). At Addicus, we try to find the strengths and weaknesses interplaying between these usually-separated aspects of your financial and personal life, and make them work together.
Debt is an important part of anyone’s PFE, and is most useful with specific types of assets. We use the term “leverage” to refer to useful, strategic debt.
Houses, cars, boats and other “toys” commonly enjoyed by the wealthy are lifestyle assets. They’re expensive to keep up and quickly depreciate. Though a house may accumulate equity over time, the cash tied up in a house isn’t liquid; the property will most likely remain a personal asset that is never monetized to the degree most investments are. Not to mention, a home requires ongoing funds to maintain. For these reasons, primary homes and second homes are considered lifestyle assets. They are not investments. They are not leverage.
Commercial real-estate, raw land, business interests, and paper assets are a different story. These assets have associated costs, but the assets are generally created or acquired for the purpose of added cash flow and/or the appreciation of the underlying asset, like. Pairing these assets with an appropriate level of debt can give your other resources and assets room to breathe, which will increase the rate of return on equity.
Read those two paragraphs again. Note those differences. Leverage is the type of borrowing used to amplify returns. It should be viewed opportunistically, not negatively, but only when that debt is managed through carefully-considered strategy.