There have been thousands of newspaper and magazine articles, as well as hundreds of books, written on the subject of managing personal debt. Most are “anti-debt” and focus on reducing or eliminating it altogether. Some offer guidance on “managing” debt (with the objective of becoming debt-free), but only a few authors actually encourage the use of debt to build wealth. Talbot Stevens is among the latter. In fact, in his third book, The Smart Debt Coach: Secrets of the Rich to Increase Your Wealth and Security, he addresses all three strategies: eliminating “bad” debt, managing “good” debt and borrowing to invest in order to increase wealth.
Following the increasingly common “storytelling” approach popularized by David Chilton’s The Wealthy Barber, Talbot’s main characters include the unwitting narrator, Joe; his eager to learn wife, Michelle; and their newfound financial mentor, Bruce, whom they meet at their sons’ hockey game. In addition to being a former kid’s hockey coach, Bruce is actually a financial advisor (coincidently, with the surname Talbot). Although the setting and conversation may seem somewhat improbable and contrived, the advice that Bruce gives is specific and detailed.
The book is divided into three parts:
– part 1 helps us understand that there is a difference between those who are “Gonnabe Rich” and those who “Appear Rich.” It also defines “bad” debt and “good” debt, with the former being money borrowed to buy something that will decrease in value while the latter is borrowing to acquire something that will increase wealth. The borrowing costs of good debt, it’s noted, are often tax-deductible, thereby aligning the use of this preferred debt with one of the basic principles of wealthy accumulation – pay attention to the after-tax result.
Much is made in this section of the strategy of swapping bad debt for good debt by cashing in investments, paying down personal debts and borrowing to replace the investments cashed in. This is not an unfamiliar strategy for advisors to suggest to clients – although its use has several caveats around selection of securities, market volatility and the multiplier effect of leverage.
Another favoured strategy is the grossing up of RRSP contributions, which converts the after-tax dollars available to invest into the equivalent, before-tax amount. The argument is that unless you invest the equivalent before taxes, you end up investing less into the RRSP than intended.
The balance of Part 1 is centred on the dialogue that might take place between an advisor and a client regarding such things as setting priorities, commitment to implementation and the engagement agreement. The section concludes with attention to the “pay yourself first” canon and the “pay down debt vs RRSP” debate.
– part 2 is about reducing bad debt in order to free up cash flow for investing. This section includes several time-honoured strategies, such as buying a slightly used vehicle rather a brand new one; staying below the total debt service ratio that banks typically use to determine how much mortgage you can afford; consolidating high-interest credit card debt through home-equity loans and maintaining a good credit rating so you can qualify for lower-interest rate financing if required.
– part 3 switches gears to “accelerating [wealth] with smart good debt strategies.” This section addresses risk tolerance (although not in those words); the need to invest in equities for long-term growth; and diversification. Another example of how to speed up wealth accumulation is the author’s suggestion to augment the intuitively correct but emotionally difficult “buy low/sell high” strategy by borrowing to invest when markets are down and implementing a forced savings plan through a disciplined loan-payback plan.
There are numerous other strategies throughout, but these will give you an idea of the scope. None are profound or completely original. Nor is this a literary masterpiece. What I would say is that Stevens surrounds his concepts with folksy, real-life examples that drive home the message.
One unique feature worth noting is that this book comes with a guarantee: anyone between the ages of 20 and 60 who does not feel that acting on one or more ideas in the book can help them benefit by at least a $1,000 in their lifetime may return it for a full refund.
This is the type of book that every advisor should write, showcasing a topic with which they are both extremely well informed and passionate in order to convey their strongest beliefs to current and prospective clients.
Stevens is not an advisor; however, he obviously has developed his beliefs and zeal for the appropriate use of borrowed money over years of experience in writing and talking about the subject. And while you may not agree with his views or strategies, you should at least be aware of them.
The Smart Debt Coach: Secrets of the Rich to Increase Your Wealth and Security
by Talbot Stevens,
Bloomberg Press; 192 pages, $24.99
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