INDUSTRY INSIGHT
Wealth Management
SPONSORED CONTENT
Debt
DoneFinancing Responsibly
Right & Reaping the Benefits
I
f the mortgage crisis taught us one lesson, it’s not to buy what you can’t afford.
Seems logical, doesn’t it? Unfortunately, many people choose opulence over
economy and buy their way into unmanageable debt.
But debt isn’t always bad. Bonds are an integral part of our economy and often
used to stabilize portfolios against stock market volatility. Almost every company
uses loans in some aspect of their business, such as buying new equipment or
financing inventory. Then, while it’s a point of contention, debt is regularly used by
the government to keep its wheels turning, when taxes and other revenues alone
aren’t able to do so.
Under the proper circumstances, debt is good! To determine if taking on debt
is the right decision, there are some questions you need to think about before
signing on the dotted line.
1) DO YOU ABSOLUTELY NEED WHAT YOU WANT TO BUY?
A. The most frequently leveraged purchases are homes and vehicles. Almost
universally, a home and car are integral pieces of the owner’s life and have
enough utility to warrant debt. Problems arise, though, when want outpaces
need and the purchaser owes more than he owns. Think to yourself, how
substantially will my life improve if I buy that ski house? Sports car? A lock of
Elvis Presley’s hair? (sold at auction for $115,000 in 2002)
2) WILL MY PURCHASE OUTLIVE MY LOAN?
A. Will the $40,000 car you are financing last through the 48 months you’re
making payments? Consider the possibility that the car cannot be repaired
and is deemed a total loss. The insurance company might give you money,
but there is no guarantee that it will be enough to cover the remaining balance
of your debt, let alone provide enough for a down payment on a different
vehicle.
3) WHAT HAPPENS IF THINGS GO WRONG?
A. To dismiss a loan, there is generally one solution: pay it back. If the loan
is small or the cash is available, you can simply repay the loan using larger
payments or a lump sum. If the loan is too large to be terminated with
readily available resources, your other option is to sell the asset, then use the
proceeds to repay the loan. With the second option, your challenge may be
finding a buyer who wants to pay the price you feel is fair.
4) CAN MY MONEY BE USED MORE EFFECTIVELY ELSEWHERE?
A. When you start thinking in terms of where your money will work most
efficiently, your asset management becomes a bit more complicated. This,
This Industry Insight was written by H. L. Bud Kahn, CPA, CFP®, CIMA®.
Mr. Kahn is the founding principal of Wealth Management Strategies, Inc., a Pittsburgh-based
enterprise whose professionals provide financial planning, asset management and other wealth
management services for a wide range of individuals and families throughout the eastern United
States. Mr. Kahn’s professional background also includes 18 years in practice as a CPA.
Mr. Kahn is a graduate of the University of Pittsburgh, with a BA in Economics and an MBA in
Accounting & Finance, and Robert Morris College with an MS in Taxation. Mr. Kahn has also
completed executive education studies in finance at the Wharton School of the University of
Pennsylvania. He is a member of the Investment Management Consultants Association, the Estate
Planning Council of Pittsburgh and the Allegheny Tax Society.
Mr. Kahn lectures frequently for numerous professional and civic organizations on a wide range of
topics in the areas of wealth and income distribution planning and alternative investment opportunities
in the real estate and natural gas industries.
Mr. Kahn’s biography has been included in Who’s Who in America, Who’s Who in the East, and Who’s Who of
Emerging Leaders in America. He is also active in several local charitable organizations, and is a graduate of
Leadership Pittsburgh. Mr. Kahn is married and has two sons.
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however, gives you the potential to have your cake and eat it too. To position
yourself in such a way that your money is helping you to buy what you want,
but also making you more money, you need to examine interest rates and
potential returns.
If you have $40,000 in cash to spend on a $40,000 car, but finance half of it
instead, you still have $20,000 available to invest. Consider a 48-month loan,
at a 2.9% interest rate you will end up spending $2,456.77 over those four
years in interest. During the same four years, if you invest your other $20,000
in a security that could be expected to return *8% annually, then you would
feasibly have $27,209.78 after the same four years. That’s a $4,753.01 gain,
because you decided to use debt to your advantage.
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qualified financial professional, attorney or tax advisor regarding your individual situation.
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