Using Debt to Build Wealth with Tom Anderson #637

guest today wants folks to take another look. He wants them to reconsider debt. And Tom Anderson he's the author of the New York Times bestseller The Value of Debt, and he's actually written multiple books on using debt in order to build wealth. But while most financial planning experts are only looking to grow assets and to decrease liabilities, Tom advocates for the strategic use of debt. And that's what we're talking about today. So Tom, thank you for

joining us on the podcast. Hey, thanks, Joel and Matt. I really appreciate it's a pleasure to be hearing. We're glad to have you Tom. And the first question we ask everybody who comes on the show, We want to know kind of what they like to splurge on. Wow, they're saving and investing and thinking about their future. What is it that you like to splore? John? We call it the craft beer equivalent because Matt and I we like craft beer quite a bit. What are you literally

drinking one right now? Yeah? So what's your craft beer equivalent? Tom? Wow? I like that craft beer plan. That's a good one. I would say that my splurge is a couple of years ago I started getting into sailing, and so anytime you do that, and it can be a very expensive and nice splurge, I try to keep it under control by just doing it as a share. So I'd have a boat share that we enjoy with our family a whole bunch. Oh nice. So are you paying for access or do you have an actual boat that you have

some sort of equity belts up into. How does that work? Oh? It's actually a really neat program. We should do a separate show on it. I'll just give you the quick overview. So you do. There's um eight families share it and what they have is at the months in Chicagos where

I live. So you have made June, July, August, and September, and each day has two spots, and you have this auction every year basically, and you allocate the shares, so you get to go out about thirty times, but you basically only have about an eighth of the expense, so it works. It's a little bit more than that. But yeah, you don't have to worry about the maintenance, and it's just a great, great, great program, and you don't have to worry about all the pain and the things about

owning a boat. So yeah, that's the way to get out of the nail. Then owning a boat completely on your own and everything, all the headaches that come with that are all on you. But when you share it, it's yeah, you get to distribute that mess. Yeah. Well, I mean, even like we've got a friend out in California, and I mean when they were living out there, they were they were part of like a boating club or something like that, and they were they were spending a decent,

decent amount of money. But I still got to think that you're winning one of those clubs is still a more affordable way to go out out on the water rather than actually purchasing a boat. And then having to what is it you pay for a slip that's at the right term, I don't know. Yeah, but there are all those expenses associated with it. But that's really cool, uh and I guess with you being Yeah, in Chicago, there makes a lot of sense to get out on

that lake. Yeah, it's a short season. And the nice thing is, I mean the average user only gets uses seventy percent of their spots, so I mean it's a lot to get out there twenty times and you get thirty spots and the remaining open spots you can end up using and they kind of go into a lottery system. So yeah, it's it's great. I can't imagine who'd get out more than that. Nice All right, Well, let's shift gears and instead of talking about boating, let's talk about debts.

Like generally, yeah, you talk about just how debt, how it gets a bad rap. It seems like anti debt hysteria. It seems like it's running rampant, and on its face it kind of sounds like an odd take. But why is debt so often misunderstood? I think debt is so often misunderstood because a lot of people have a bad experience with it, and there's a lot of bad debt that's out there. So first of all, it is absolutely

not my view that all debt is good debt. Essentially, I think there's some debt that's good debt and some debt that's bad debt, and debt that's good debt should be evaluated thoughtfully, and debt that's bad debt should be eliminated. It's it's really about that simple. Yeah, So this is going to be a nuanced conversation here, which I'm glad. I think what Matt alluded to in the intro when he said that a lot of people say debt is dumb,

that is not nuanced, right. That is one particular take that tries to say that debt is a nail and it should be pounded, you know, anytime like that. It's really just like a one size fits all kind of way of viewing the world. But you're also, yeah, you're not talking about taking on debt to spend lavishly through out there and by ridiculous things that you can actually afford.

You're talking about taking calculated risks, right, very much. So this is absolutely not about buying things that you can't afford. So this is just about making strategic decisions with when you should be using low cost debt and when you should be choosing to pay down that debt versus when you should be choosing to emphasize things like liquidity and flexibility and just building up your savings. And we're gonna

get to all of that. But so as a quick example, like skipping retirement contributions, I've oftentimes we're faced with a question here on the show where folks are like, do I pause my retirement investing in order to pay down debt? Do I take money out of my retirement accounts in order to pay down this debt? That's often a question

that folks are wrestling. We literally had a listener recently, Tom who said, Hey, I've got a sixteen percent debt, but should I take my contributions out of my rothira to pay it off? These are the kind of questions that we're getting regularly. Yeah, it's it's one of those options. But you often will say that folks are being short sighted if they skip out on those retirement contributions in order to pay down some of that debt. How might

that actually end up happening. Yeah, so let's lean into that listener had asked and kind of think about that question just a little bit. So first of all, let's say that let's just go to the extreme, because I think we can set the table with an example that

we would all agree. Let's say that you are in the fortunate position that you got a mortgage when rates were really low, and your mortgage is let's say three percent, and let's just say that it's tax deductible, and today there are bank accounts that in your checking account you can earn you about three to four percent. So if my after tax mortgage is about two percent, I think in this environment we would say, hey, I don't know that I want to rush to pay down that type

of debt. Does that kind of simple example start by making sense of maybe that would be a form of debt that we wouldn't want to rush to pay down for sure? Yeah? Yeah, yeah, I mean so basically, I mean you're talking about capturing the spread here, right, And so is there I guess, is there some sort of

threshold is in your mind? Is there a minimum sort of spread that you would want folks to see before they are considering something like that, or is it more on an individual basis that you want folks to consider that. This is absolutely about capturing the spread, and this is exactly where the conversation is fun to have. So, first of all, if we can start by saying, hey, some debt might be good debt, and I should be thoughtful

about paying that down. And an example of that would be if I had a mortgage at two percent or a student loan at three percent, that's already then people are being thoughtful and saying, well, hey, maybe that might be a good form of debt. Let's just jump to the other end, and then we'll come in the middle, which is where your question is. If I have a credit card debt running at twenty five or thirty percent, if you pay that down, you get a guaranteed return

of twenty five or thirty percent. So nothing delivers that type of return. So obviously things like credit card debt or anything over twenty percent we can very quickly agree is bad. So if we just set these field goals here essentially, of like let's say two percent is good and twenty percent is bad, we now can talk about the middle. So then I think from there the preference is to be toward the lower end. It's more likely to be good, and toward the higher end it's more

likely to be bad. So you can look at this in absolute rates, or you can look at it and relative. So I like to think about it like, any debt that's over ten percent, if I kind of call that the midpoint, is going to be more toward the bad category. So that's going to be most forms of consumer debt. But any debt that's going to be kind of under the seven percent range, I think it's going to be

more toward the potentially good category. So that might be things like mortgages, it might be things like student debt. And between seven and ten really depends and is a little bit more personal, but I think it can require a little bit more analysis, and it's a fun area to talk about. Yeah, And one of the things you just talked about kind of with mortgages, it's not just the interest rait that you're paying, but there's also potential tax benefits, so you get from holding onto that mortgage.

And I think you've said that it's a mathematical fact that debt can increase or turns and reduce taxes, which is a bold statement, but you're definitely right on the reducing taxes part. But yeah, is that a big part of the reason to consider holding onto debt as part of kind of your overall money strategy. Yeah, and a lot of tax things have changed recently, and you know, the original book came out ten years ago, but there always are different tax benefits, and well that's a part

of it. I think you can almost even set the tax part aside and call that like kind of gravy and say, look, if on average, if your investments can earn you know, forget ten percent, let's just say they earn eight percent, and let's just say that your debt cost you know, six percent, then you're capturing a spread of two percent, and that can add up to thousands and thousands of dollars a year, can add up to

hundreds of thousands of dollars over a lifetime. Right. So it's like a very high level sort of view here anytime you approach debt, like there obviously have to be seen guardrails in place, right, And so I'm talking for about about your your five tenets of a strategic debt philosophy. You kind of share what those tenants are, the kind of explain how it is that we could use those tenants to implement some debt in our life in order

to build wealth more quickly. Yeah, So I think the first thing is is that you really just want to be thoughtful about what applies to you, and so you want to start by taking a holistic view and looking at the big picture. So that's where it starts. So when you're thinking about these different pieces, you want to start with the big picture. What are the things that I'm trying to accomplish. So this is a part of

a broader philosophy. And so the first thing is that we want to be looking in a big picture sense, and I think that what that means is you want to be looking across kind of your complete financial plan. So the next part of this next tenant is to say, like, once you're looking at the big picture, to explore thinking and acting like a company. So when you think about it, companies have a CFO, and what a CFO is They

actually design the balance sheet of a company. They choose how much debt that should have and how it should be structured. So if you think about a company that you like or admire, like an Apple or a Google, they have debt which they choose to have because of the liquidity, the flexibility and the tax benefits associated with that debt. They could choose to not have it, but they actually choose to have it. We'll kind of explore

that a little bit more. But it's an interesting thing where I think we can learn not that we are companies, but we can learn from the ideas that they're doing. Does that make sense? Yeah, well, I mean, just to interject real quick, you said that we're not companies, but I should be thinking of myself as like the CFO of my own finances, And I like what you said

as far as the debt that companies take on. It's an intentional decision, right, Like, like you said that they're designing that, and unfortunately, oftentimes in our lives when we enter into debt, we're not doing it on purpose. It's something that we're sort of we're being sold quite literally goods, and it's something that we're more or less falling into as opposed to strategically choosing on purpose. Yeah. Yeah, yeah, it's actually lean into what you're talking about just a

little bit. See, if I'm a company and I don't have the right debt ratio, then someone like a carl Icon gets crabby with me and they come in and they buy me and they lever me appropriately. Right, So all companies have this like pressure by shareholders to kind of have the right type of a debt philosophy. But people tend to either have way too much debt or

they're completely debt averse. And I think that there's this optimal middle ground where very few people actually happen to be and those that are actually are there by luck more than a strategic choice. We just start out with way too much debt and then we go to way too little, and I think there's this balanced ground that's

somewhere in the middle. Yeah. Yeah. You also you talk about being open minded and then verifying what works, And I think that being open minded is probably really important because Matt and I we sometimes find ourselves in this interesting place as personal finance podcasters where we talk about using debt strategically and we talk about the differences of good debt and bad and we'll get pushed back sometimes from the anti debt community and they're like, no, no no, no, no,

all debt is bad. But the reality, especially when you're talking about the mortgage rates. That's the perfect example right now. There's a lot of our listeners who have locked in low mortgage rates of two and a half to three percent. Three and a half percent maybe right, and now when you can make more in a savings account like it, just you have to be open minded and be willing to change your trajectory a little bit based on kind

of what's happening right now. But one of the things you talk about is the optimal debt ratio, and I think that's probably something worth kind of drilling down on a little bit, because it's obviously, like you said, some people have way too much debt. Some people have no debt at all. But yeah, talk to us about the optimal debt ratio and how we kind of figure out what that is in our lives. Yeah, So the optimal debt ratio is how much you're borrowing against the assets

that you have. And so if I am, you know, buying a TV on a credit card, then a year from now, my TV is worth less and my credit card debt went from let's say it was a two thousand dollars TV, if I didn't make payments on it, that's I know, twenty four hundred dollars. What is worth a fifteen hundred dollars TV, and then my debt ratio would be upside down because I own more than I owe, and so that would be an example of a bad

debt ratio, right, And that makes sense. The other side of this is, let's say that you own something like a house, which you know certainly can go down in value, but maybe over a long period of time, like ten or twenty years, might tend to go up in value a little bit over time. Then you want to think about, well, if this asset is going up in value over time, even if I keep my debt relatively the same, it's

actually gradually falling. So if you even just make the base payments on your student loan or to just make the base payment on your mortgage, but that house is going up, your debt ratio is actually drifting down. And so companies look at this a lot. And what I like to kind of explore as a debt ratio of around thirty percent, And that's where people tend to have way more debt than that or way less debt than that.

But it's a fun place to start the conversation. I think the maybe how it does we define debt, I think that can go a long ways and helping us to determine whether or not certain debts in our lives might be helpful, you know, how they might be able to help out our bottom line or not. We'll get to some of those different definitions, and we'll kind of talk about liquidity as well. We'll get to all of that right after this. All right, we're back from the break.

We're still talking about using debt to build wealth. We're to have this conversation with Tom Anderson. And Tom, you have different debt definitions basically, and like I alluded to, Matt and I we talked about the kind of good debt versus bad debt, strategic debt versus debt that's gonna leave you kind of by the side of the road, bleeding and hurt. But you're clearly you're not talking about card debt is something that we should hold on to.

But you have three different, like working definitions. Can you define them their oppressive debt, working debt, and enriching debt. I'm curious to hear kind of yeah, what those are for you. Yeah, So oppressive debt is where I just want to make sure that everybody on this call is completely aligned and that all of your listeners know things like credit card debt, debt that costs in my world more than ten percent, and clearly debt that costs more

than twenty percent is oppressive debt. It is bad debt. And all of the conventional wisdom that you hear on debt is correct with respect to oppressive debt. It just puts you in a cycle that is difficult to break. If you're buying things that you can't afford, you never break through. And I think that a very solid fifty percent of America gets trapped by oppressive debt, perhaps benefits from conventional wisdom, and I just want to hit the

table and scream, like oppressive debt is terrible. So working debt and enriching debt what are those for us? Then? So working debt is going to be things that we're talking about, like a mortgage. It's going to be lower cost, maybe a low cost car loan, which is not going to be a bad thing to buy a car rather than buying a car with cash. There could be reasons to use a low cost car loan rather than paying

for your student, your school and cash. There can be a reason to have a school loan, or you're buying an asset that you're going to pay for over time or earn more money over time, that's going to have a lower rate associated with it, a rate that's typically you know, in the load of mid single digits. Those can be examples of good debt that should be a thought of much more carefully and can potentially add value to you in your life. That's working debt. And then

the last type of debt you mentioned is enriching debt. Yeah, some people would say that's an oxymoron, So I'm curious to hear how you talk about that. The interesting thing is that when you think about billionaires, what percentage of them do you think borrow money? Oh? Most of them, all of them, virtually all of them, So that's interesting.

Most of them and all of them. So we don't have great but it's approximately seventy percent of them is the best that can be discerned, but with trends toward higher, but it is very clear that the vast majority do borrow money. So why if you're a billionaire would you choose to borrow money, because of course you could choose to not have debt. So why are we seeing the affluent people in America the one percent that could choose

to not have debt. Why do you think that they choose to have debt so they don't have to sell their assets and pay taxes on those gains. That's absolutely one reason that they do it is so they don't have to sell assets so that they don't have to pay taxes on the gains. But sometimes if you see, like you know, Elon Musk has many different businesses, but then he's sitting around and he's like, hey, I'd like

to buy Twitter. So he wanted to fund that acquisition with debt by not selling his other assets, and so then he's constantly building up more assets. And you see this across the high net worth spectrum. These are enriching debt is when you could choose to pay cash for something, or you could choose to sell an asset for something, but you are making a strategic choice to use debt

as a tool to buy it instead. You see that all the time and the high net worth market and the ultra high net worth market, and it is a strategy that the rest of America can learn from. So why don't they? So my question is obviously paying cash for everything, not taking on additional debt like that is going to be a more straightforward and simple path to take. Is that the main reason is that why it is that folks tend to think, all right, I'm just going

to focus on paying off my mortgage. I'm just going to focus on completely eliminating all forms of debt that I have, as opposed to looking at it a little more strategically. Is it because folks aren't thinking about it strategically, Yes,

it's because people aren't thinking about it strategically. And as you move up the net worth spectrum, you get more and more advisors, and those advisors tell you about the benefits of the strategies of using your balance sheet in a holistic way to kind of maximize is your long term net worth? You really these high net worth people are like little companies, right, with lots of different advisors,

and they're thinking about things strategically. And that's what I think that we can do as well, is that there are times when you could pay cash for something, but you instead, or you could pay down your debt, but you choose to make a different decision. And it's when you're making a different choice, you're choosing to invest rather than pay down debt. You're choosing to buy an asset that you're making a strategic choice, and that's where I

think we can learn. Yeah, it makes me think of the one time, the one time that I bought a new car. I bought a Nissan Leaf and I chose to get financing for the car because it was zero percent for five years. And so it was one of those things where normally I would one not buy a new car, or two if I did, I would pay

cash for it. I would, and I had the money I could have, but it just made sense when someone saying zero percent and it was something I was going to buy anyway to make that choice and allow that debt to kind of free up my cash to do better things. And but one of the things that you say too, you say that whether debt is good or bad, it depends on your resources relative to your needs. And basically, like where people are at in their financial journey should

influence how they think about and incorporate debt. Right, So how should people think about, Hey, I'm on you know, I'm just getting started in my personal finance journey. How should I think about debt versus someone who's years and years into investing and saving and paying down the worst kinds of debt. Yeah, so we're all at different points on the journey, and you've got a lot that kind of combines here. So let's use your example of the

car for a second. Over time. Of course, it's nice if you can capture the spread, and it would be great if you could earn let's just say six percent and your cost of your car loan was four percent, then you know that's nice. But early in your journey and thinking about your car, what I think is actually more interesting and more important is you said that you had the cash and you could have paid for it, but you were attracted to the zero percent. Did I

hear that right? Yeah? Well, I was planning I get in the carney where there were some tax federal and state tax incentives, and so it was like, okay, this is the time to pounce. The overall cost of that car is low. Normally I wouldn't buy a new car, and then boom, sugar or cherry. On top was the fact that I could get a zero percent loan. So I love the decision that you made there. I just

think it was perfect. And one of the biggest reasons I think it was perfect is it left you with the money in the bank that you would have had in the car loan. Otherwise. You see what happens is because you had that money in the bank, if you when you lose your job, you can't get the money back out of the car. It's so important that we have a cash reserve and that we have liquidity. And so when we're looking at these different phases, some people are so focused on paying off debt, any form of

debt at any rate quickly. But once you pay it off, if I pay off my student loan, I can't get that money back. If I put down one hundred thousand dollars on my house, I can't access that. If I lose my job, I pay off my car. The only way if I can get that money back is to sell my car. And that's why we get into this liquidity trap. And it's actually liquidity that creates crisis in

people's lives. Yeah. Although note and a recent talk you mentioned the intersection of a crisis that you were facing personally, the intersection of that with what the market was doing at that point in time. Can you share that that story with our listeners. Yeah. So, in at the time I was living in Cedar Apids, Iowa, and the sixth worst natural disaster in the history of the United States up to then was in Cedar Appids, and the Cedar

River just leaped out of its banks and provide. It was a huge amount of flood damage, and my office was destroyed, and it was in an area that wasn't supposed to even get wet. The county kept all the court records in the basement of the building and didn't even move them because this is a site that it shouldn't get wet it And so you know, when that happens,

you need money right away. And natural disasters strike everywhere, hurricanes, floods, tornadoes, it's you never know, you know what it's going to be. And insurance can certainly be helpful, and it was helpful for me, But insurance doesn't say, hey, you need a lot of money right now. I'll just send you a check and you send back the rest. Like you need liquidity to get through you know that scenario, and you

need it before the insurance is there. The timing of that, if you caught it was in two thousand and eight and coming right into the financial crisis, And so if my solution would have been well I'm going to sell my assets at this point in time, that would have been devastating. I just needed to get through a terrible period that was already you know, my life upside down and my business under fire. Just having access to money is what really matters, and that's what can be access

to money. A line of credit can be accessed to money. Cash in the bank can be access to money. But people just don't emphasize enough having liquidity, and they instead prioritize paying down debt at all costs, And I just I don't understand it. Yeah, So liquidity puts you in a position of power in a lot of ways, right where you can make different choices as opposed to having no cash in the bank or no access to funds. But maybe a slate of zero debt. But let's talk

about maybe a few examples. For instance, if you own a home having a helock, right, that's one way in which you could have potential liquidity. How else have you seen like middle income folks using debt intelligently, Like what are the methods, what are the paths they pursue for that? Sure? Well, so one of the most simple things that I don't understand why a lot of people don't do. But it's having a credit card and not using it. There's a

lot to that. I mean, that's just interesting to pause on right or you using it and paying it off every month. So if you have a credit card and you can access you know, five or ten thousand dollars if there was an emergency, But the second that you start to carry a balance on a credit card, you now if there's an emergency, you have two problems. You owe that huge interest rate on the balanced, you can't repay it, and you don't have access to as much credit.

So there's so many bad things about carrying a credit card balance. That's just a huge place to start. Don't carry a credit card balance. You avoid appressive debt. You have access to credit, and that's just it's kind of base one. Number two would be a home equity line of credit. Rather than using the home equity line of credit for the home improvement project, imagine that you have access to the money that you could borrow in case you're in an emergency. This is what CFOs of companies do.

All companies have access to lines of credit and bad time. So that's the first job. If I'm president of a company and you're the CFO. It's a set up a line of credit, and if you didn't, I would fire you. So a whole equity line of credit, a credit card, a personal line of credit, setting them up and not

using them as a fabulous defensive strategy. I mean, bottom line, there are massive amounts of folks who might go through those initial stuffs, but then they don't hit pause, they in fact use them, and I think that's the biggest problem here. Like I think from a psychological standpoint, the biggest hurdle is for folks to have is to have a table lined with a bunch of different pies that smell and look wonderful, but they're told don't touch of

those desserts. It's having that cash available to them, and they're thinking, man, I would I would really love to be able to do something. It takes some of those lines of credit, but I'm currently not in a situation that calls for that. I think that's the biggest difference between you know what it is that you're advocating here versus the more mainstream conventional wisdom of completely eliminating debt.

There's that psychological side of things where folks like you said, Jell, where folks don't have that discipline is to say no, and that is the fifth tenant is what you have to as we were talking before, you have to verify what works for you. But obviously, mathematically and logically it's better for someone to have access to money than not have access to money. So my view is that you should have access to lines of credit and that that will be good for you because it protects you in

a bad time. That is right out of the CFP book, the Certified Financial Planners. I mean, this is what you should do. But you are absolutely right. A lot of people can't handle having access to the credit because then they will spend it. But you're spending money that you don't have, so that is of course a terrible idea and not what we're talking about today. Yeah, so obviously we're seeing you mentioned savings accounts rates in the three to four percent range, which is nice to finally see.

We had a bunch of years there where the best you could expect to earn will be half a percent, And so I guess I'm curious, did like near zero rates on savings make you feel any differently? There was a whole contingent of people who would say cash is trash and put your money to work for you in the market, and liquidity became less of a concern. Or did you still feel the same way about liquidity even

at the time when savings rates were pretty abysmal. First of all, I'm always a fan of liquidity, and so there's so from a liquidity perspective, you want to have access to lines of credit and you want to have a three to six month cash reserve, and those two things of conventional wisdom are absolutely completely right. So having some cash and having some debt just kind of like back to that car examples, not necessarily bad. You don't

always have to have a positive spread. If you had some debt that was costing you a little bit more than you were earning on your cash, that's not necessarily a bad thing because you benefit from the liquidity. So then when you look at interest rate environments in two and thirteen when the book came out, let's just say that interest rates were at zero on cash, and borrowing rates were sometimes zero on a car, but typically higher

in a home. So well, why if cash is at zero and my home loan is at four percent, your value of debt idea is a dumb idea. Well, of course we can look at that now and say, look over the past ten years, anything that you owned has gone up a lot in value, and cash rates are higher, and if you locked in those low rates, of course that looks like it was a great trade. A famous economists said that interest rates are neither good nor bad. They're a function of the environment at any point in time.

So you don't want to be looking at your debt relative to just your cash. You want to be looking at it relative to everything that you own. And so you know, if stocks go up at inflation plus three to four percent over time and you're borrowing at rates closer to the inflation than over time, these strategies add up to it just a tremendous amount of value. So you have less stress and you're making more money when

you're embracing these ideas. Okay, yeah, all right, So Tom, we've got a couple more questions to get to you with you about debt using debt to build wealth, including we want to talk about what if you've already got debt on hand, how do you know whether that's a debt that needs to be eliminated or one that you should, yeah, keep around. We'll discuss that right after this. All right, we are back and we are talking with Tim Anderson still about using debt in order to build wealth. And

just before the break, you're talking about interest rates. How different rates, whether or not they're good or bad, isn't necessarily the case. Oftentimes you have to look at your own personal situation and along those lines, like what about the psychological reality of debt? Right, because different folks have different preferences as to what it is that they prefer in their own lives. And there's a lot of folks out there who find it hard to sleep at night

having debt hanging over their head. How do you talk to your clients when they get nervous about keeping some of those smart debts just around longer in their lives. Yeah, So often what we tend to do in America is we take on a whole bunch of debt early in our life, and then we spend a long number of

years racing to pay that debt down. And then we wake up when we're fifty and we feel like we're undersaved, and so then we try to save for fifteen years and then we want to retire, and that mathematically just doesn't work. I mean, it works if you're going to save basically twenty five percent or more of your income, but if you're not going to save at a very aggressive rate, that strategy is flawed. It is why a lot of people wake up and they feel behind, and

it's why people don't feel on track. If you take on too much debt early at too high of a cost, and then you spend all your time paying that down and then you wake up and try to save, the math doesn't work. So I don't think that you should sleep well with that strategy because it's a mathematically flawed strategy. The alternate strategy is that you could build up assets

early in your life. Invest This is not about taking the money that it would have gone to pay down debt and going to Disneyland or going voting, like we're talking about it in the beginning. It's about taking the money and saving it. And once you save it, you can either put it in cash, which builds up your liquidity, or you can build up your investments. But if you start saving and building up your investments early, you have more money growing for you for a longer period. Of time,

and then you can pay down your debts later. So then what you happens is, let's say I wake up if I have two million dollars of assets and five hundred thousand dollars worth of debt, I'm a millionaire, right, I'm worth one and a half million dollars. That's better for me than having no debt and five hundred thousand dollars of assets. And that's where just a lot of people find themselves as they wake up with maybe I paid down my debt, but I don't have enough assets,

and their dreams don't come together. My goals make these dreams happen. Yeah, I think that's really important. Well, one said that mathematically, it just doesn't work right to take that approach of not investing until you're just a decade and a half from retirement. But I also love what you said there too, And most people are thinking of debt as like that. People are taking it on purposefully to buy things that they can't necessarily afford. But you're saying, no, no, no,

that's not what debt should be used for. Debt should be used to allow you to funnel that money into more productive ways, right, It should allow you to by keeping that debt in place, the money you would have put towards the debt you should save. And people are not saving enough money, and that is the problem, and that is why we have all this stress. That money

is the number one cause of stress. People don't have liquidity, they don't have enough savings, and that's why so many people are in the personal finance realm saying it's a one size fits all approach and that debt should just be avoided like the plague, because they know that the reality for most Americans is that if they take on more debt, they're they're not going to use their extra ash to save or invest, They're going to use it to consume. So's that you're right, and that's just terrible.

So how why is it the top one percent of America has a bunch of bankers and advisors that are saying to them, here's how you can use debt strategically, and then the rest of of America we say, well, you're not responsible enough to handle any of these ideas, and so therefore we're just going to tell you one size fits all all debt is bad, get rid of it as fast as you can, and mathematically, we know you'll be stuck. It doesn't seem to make sense either.

I mean the difficulty lies in the fact that, like it makes me think of the charts that you see where the vast majority of Americans have the vast majority of their wealth tied up in their primary residence. I guess the advantage there is that when folks know that they're paying that they're paying their mortgage or in most cases just paying their mortgage, like it's a it's a forced form of saving and investing their money in a sense.

I guess I just can't get past that psychological side of the equation because like, mathematically, like I told, agree with you, and so maybe I don't know. Maybe this is where this message isn't necessarily for everyone out there, because if everybody did exactly with you, know what you're saying here, like everybody would be smarter and richer. This is a message for folks who are either a little more disciplined or who can maybe be a little more

rational in how it is that they approach money. But I think what we've what we've seen is that the majority of folks aren't very rational when it comes to their money. Like they make knee jerk reactions, they make purchases that they're not necessarily prepared for. They bring on debt into their life that wasn't necessarily designed or planning for. It was more of a, like again, something that they fell into and it's not something that they're able to

continue servicing. So I don't know, do you have any thoughts or any advice for folks as to what approach maybe they should take, because on one hand, I totally hear what it is that you're saying here, But then on the other hand, just the statistics show that it seems that a lot of folks aren't actually able to take a more strategic approach when it comes to the debt that we have. Yeah, there's quite a bit to unpack there, so let's take it in our section. No,

it's it's great. I think that the most important thing that we can accomplish in this interview is if somebody becomes more thoughtful that maybe some debt is good and some debt is bad, then that's a mission accomplished. And if they think, hey, I need to value liquidity, then that's part of the mission accomplished. Because it's hard to get into specifics for people. But then the next part

of this is to exactly what you were saying. So let's say my mortgage is twenty five hundred dollars a month and I have three thousand dollars, and I'm thinking, well, I'm going to pay down more on my mortgage so that my mortgage is paid off earlier as I get closer to retirement. You can imagine somebody thinking something down that thought path, right, Yeah, so I'm going to be a good steward of my money by paying more down

on my mortgage. My mortgage is paid off earlier. That's a hypothesis that someone has that that's a good and responsible decision. Anyone who is able to make that type of a hypothesis or that type of a thought process should equally be able to do the math on what if they invested the five hundred dollars instead of paid

it down on their mortgage. And my simple thing that I would want people to do the analysis on is if you took that money and saved it and invested it responsibly over that same thirty year period of time, you'll have more money. You don't have to believe in much for that to be a better outcome for you. All right, So I'm curious kind of from a personal level.

Two time, my parents there on the cusp of retirement supposed to happen next month, which I'm excited for them about, and they have still a mortgage that's at like three percent. I think they got about six years left on it. I have told them to keep that mortgage around because the added flexibility that it gives them milk that six years. Yeah, exactly, Like I know. It may be in like the ideal

of ideal worlds. You want more money in your retirement accounts, and you want a bigger Social Security check, and well wouldn't it be nice if you didn't have a mortgage either? But do you agree or disagree? Is it better to have the mortgage on hand and to prioritize keeping their assets growing for them and just kind of paying it off as agreed? Or how should retirees think about having paid off home? Well, first of all, congratulations to them.

They're in the great shape and it's a neat conversation to be having. The best thing is if they've built up savings and they could choose to pay it off or they could choose to keep it, then you can kind of like ring a bell and say, you know, ding ding ding, right, I one, Now we are having a fun conversation. Should I pay off my house or not? And that's a need exercise. Look at the tail end

of the mortgage. If it's at three percent, the math answer is sure, hopefully they should be able to earn a little bit more in other investments, and so keeping it would be the logic answer there. When the mortgage balance gets pretty small, though, if you do just pay it off, you have a huge cash flow savings where you no longer have to make that payment, and that, back to what you guys were talking about before from

the psychological is just awesome. So once the mortgage gets pretty small, then I kind of lean towards, you know, paying it off. It's so at this point in time, I could vote either way on their kitchen table. I would just love the conversation and as long as we talked about it, I'd feel great with the decision that they made. And I would love for everybody to have the same opportunity to have the same conversation that they would have when they are sixty, sixty five or seven

years old. What a neat thing to be able to do do I want to pay off my mortgage or note? Yeah, well okay, So on that note, you've talked about the difference between somebody who's maybe looking at a like a thirty year fixed mortgage at a little bit higher rate as opposed to like a five year arm where they might be able to get a killer rate. But the conventionalism goes, no, no no, no, no, you don't want a rate that's going to end up, you know, blowing up

in five years. You want to go with the sure thing. You want to get the higher rate, but to know that it's fixed. But you kind of point out how there are multiple things that we need to consider, and I mean the likelihood of somebody actually staying in that home for thirty years. It's not super hot. It's so yeah, yeah, talk, I guess I'd like to hear your thoughts, just talk a little bit about maybe being realistic with some of

the time frames that we are oftentimes facing. Yeah. So the first mortgage that I had was a thirty year fixed, and I feel like that should have been that was financial malpractice. I don't know, no one's in their first home for thirty years, and I was in mine for three or four, which is relatively common, and the right product for me would have been, you know, a five year, and there's no chance that I was going to be in where it was for that long of a period.

So you are absolutely right. When you're in a thirty year fixed loan, you're not locking in interest rates for thirty years. It's only if you're in that property, which is what, as you both said, is very unusual, and so I agree completely. So I like things that are

in the five, seven and ten year range. I'm not opposed to interest only mortgages as long as you're saving the difference and you're not doing that for payment, which I hope people in California or anywhere close to water or listening to, because a lot of people use those to get more house and that's not what you should be doing. I don't like a fifteen year fixed because I don't like the amortization and tying up the extra money in the home. I'd rather be building that up

in a liquid portfolio. And I have been a pretty big advocate of the thirty year fixed when rates have been low. That has changed a little bit here recently, obviously, but for the past number of years if what a need opportunity if you're a little bit later in life and there's a chance that you'll be in the home for a while, to lock in the thirty year fixed. And I'm still not in any way opposed to it, because if you think you'll be in the home for a while, I think a thirty year fix could still

be attractive. Okay, Tom, this has been a great conversation, and I mean hopefully it's at least wedded our listeners appetite to learn a little bit more about what it looks like to use debt effectively. Where can they go to find out more about you? And kind of the books you've written to check me out on Amazon you

can find each of the four different books there. It's a Value of Debt and Building Wealth, the Value of Debt and Retirements, and the original one is the Value of Debt, another one out there on blockchain in the Future of Money, and would be honored for anyone to check them out. Very cool. We'll make sure to link to those books. Tom, Again, thank you so much for spending some time with us, and we really appreciate you.

I appreciate you as a fun conversation. Thanks guys. All right, Matt, good conversation there with Tom Anderson about and I'm sure some of our listeners saw the title of this episode and they were like, Matt, jel just go off the deep end. But no, we've been talking about the strategic use of debt for years and that might make us

outliers in the personal finance community. I don't know, but again I think it'll be a conversation we continue to have completely right, because, like like you said, on one end of the spectrum are folks who are avoiding it like the plague. But then on the other, obviously the other end of the spectrum, you want to completely avoid, right, folks who are taking on massive amounts of consumer debt.

You don't want to do that. But this episode is mistically end by the way he talked about buying that mortgage, and he's like, if you're doing it just to be able to afford the property, no, no, no, no no like that.

And if you're taking it on debt just so that you can afford the thing that you otherwise wouldn't be able to, that's a no no but lame product a mortgage, but a completely different heart yes, as to different way of using it might be, but yeah, this, I mean, this episode totally is for folks who are on that end of the spectrum of like, now, man, I'm paying down that mortgage because I'm getting after my finances. I like to optimize, which I'll go ahead and get to

my big takeaway. And we kind of got to it towards the end of the episode there because I was kind of torn because I'm trying to figure out, how do you figure out I heard it, I heard it in your spe Yeah, like, like, how do you figure out if you are the kind of person who just wants to simplify and tackle it, you know, skin the cat that way, or if you're the type of person who can handle maybe some more complexity and optimizing it.

And what he eventually said, I don't know his exact words, but what he was saying was that, like, if you were asking the question, can I use debt more strategically in my life? Just the very act of asking that question put you in the camp of, oh, maybe you actually can handle it strategically because you are, by the fact that you're asking that question, you're thinking strategically, right, And so I think if you if you're listening to this and you're like, no, no no, no, no, I can't

do that. But if you are finding yourself drawn to some of the other ways that you might optimize your finances, optimize your money, well I think that you possibly could be the type of person to think about your debt more strategically. You could be the person who might be more disciplined where instead of paying down that debt, you you're setting that money aside and you actually are actively investing that money as opposed to burning a hole in

your pocket and you get sucked into just spending it. Yeah, So I think that can be just a good, real fun a good takeaway for folks if you feel like you might be on the fence. Well, he talked about the optimal debt ratio, which I think was good. I think my big takeaway too, though, was when he said, you're you want to look at the holistic big picture,

and so you're right. If you had had the cash, the money to buy a home in cash five years ago when mortgage rates were at three percent or I guess probably like two and a half years ago, like yeah, there were really good rates on mortgages, then still you would want to have taken out the mortgage because it's in your long term best interest. And when you're looking at the big picture, now, boy, you feel super happy

if you have a three percent sure mortgage rates. So look at the big picture and be careful about your debt ratio. At the same time, I think there was a lot to kind of digest in this episode, and it's our goal to have folks of all different stripes on you. We had ye jesse Me come on recently,

and you know, he's pretty dead diverse. We've had Michelle Singletary and she was like, I don't think there is such a thing as good debt, And then you know, we want to interview Tom here, who says, I don't know there's ways to use debt to build wealth, And I think I fall somewhere in between, probably more along the lines of where Tom is. But I think it also needs to be said that it's different strokes or

different folks. And there's folks like our friend Andy Hill, who paid off his mortgage even though it was super low interest, right because that was what was best for him mentally, And you kept referring back to that matter. I think that's just a really important part of the conversation and we can talk numbers all day long. But if it doesn't work for us from a psychological behavioral aspect, what are you actually going to do with your life? Because on paper you could say that it'll work in

this way. And I'm sorry to interrupt, but from a business like, as businesses are processing this, you have multiple people who are sitting down together and asking these questions of the business. You have a board of directors, you know, like you've got the c suite. You have all these individuals who are trying and testing and they're all working together.

Whereas as individuals man, it can be really easy just to be like, yeah, I'm not going to spend my money over there anymore, Like I'm not going to invest that instead, I'm going to spend it over here. It's easy, and it's easy to lie to yourself. Yeah. Yeah, it's a slippery slope. You're bouncing off the crew of other people. Isn't accountability? Yeah, when you are looking at yourself as an individual business right, like, when you're thinking about yourself

as the CEO of your own finances. And there's a reason that our listeners, let's say they have student loans and the payment continues to be on pause, that most people aren't paying that those student loans off right now right because it's not necessarily debt that is the evil. It is the interest that goes along with it. And it's the interest that goes along with it. If you can't find something better to do with that money, it's and again, it's just a difficult conundrum, like there's not

some sort of easy solution. Tom. I think gave a lot of good kind of ways to think through it though, so hopefull people can make smart decisions in their lives. Absolutely. Yeah, let's get back to the beer. You and I enjoyed this episode. A Hell's Lagger. This is by New Park Brewing out of West Hartford, Connecticut. This one was donated to the show by Matthew. Matthew, we appreciate you as well as these beers that you sent us. But Joel, Yeah,

were your thoughts on this tasty beverage? Man one was clean, crisp, and delicious as refreshing. It really was light, not light in like a bud light kind of way, but just in uh yeah, like you said, it had all of those lagger like flavors going on. But yeah, refreshing and not overheavy. I enjoyed it. I really enjoyed the artwork.

The artwork really reminded me of like my aunt, my great aunt, she used to do like this technique, this Scandinavian artistic technique called rosemalling, and it really so this looks like Scandinavian art to me. This is is that like sewing, like it's like painting, but it's like kind of God, it's like geometric flower kind of stuff going on, so or not maybe not geometric. Maybe that's it looks

like this. We'll post and by the way, if you're curious what the can looks like, you can follow us on Instagram and how to Money pod, and Matt posts all the pictures of the beers we drink there. Well I do my best too, at the very least. You can find our show notes up on the website as well at how to Money dot com. And we'll make sure to link to to Tom's books as well, so

you can look into that for sure. And we have done a couple of episodes, Matt where you and I we just talked about debt and how to pursue like a strategic debt plan in your life. Where you're not overdoing it, but where you're not also buying into that debt is dumb philosophy. We'll link to those in the show notes too, so people can go back and here

maybe our unabridged thoughts on it too. So absolutely, yeah, if you find yourself wrestling with the idea and you want, like, yeah, from a principal standpoint, I want to get rid of this in my life. But I guess, truly what the question is at this point is can I handle that additional complexity? Will I do the right thing if I do, keep this debt around? For sure? Yeah, So that's gonna do it for this episode though, until next time. Best Friends Out, Best Friends Out.