Too often, we can become fixated on the accumulation of assets, and even pat ourselves on the back for our success. Nothing wrong with that – if you’re also paying attention to the right side of your balance sheet. What’s happening on the right (or debt) side can enable your asset accumulation strategy, or suck the life out it.
Assets = Liabilities + Equity. You may know the equation, or its sometimes format of Net Worth = Assets – Liabilities. When we focus too much on the assets component, we are only dealing with half the formula.
Here are some opportunities and cautions about the right side of the equation:
1. A plan to accumulate assets without a plan to optimize or eliminate debt can face significant headwinds. Depending on the composition of your debt and its annual cost, you may not need or want to eliminate the debt at this time, or you may. Either way, you need to have a plan.
2. Debt used to acquire assets can be effective if it’s at a reasonable cost and paid out before the asset’s life runs out. Remember: if the debt is greater than the asset value, it reduces your net worth. Always be very cautious with leveraging and ensure you fully understand what you’re getting into.
3. Debt diversification can work against you. On the asset side, a diversification strategy is always a good idea. On the debt side, it can often work against you. When you stack debt upon other debts, it’s usually more expensive and harder to pay off. Explore whether a home equity line of credit, a low-cost unsecured line of credit, or a debt consolidation loan might sharpen the right side and make for a better debt plan.
4. Paying off your debt, or paying down your debt may not always be the top priority for you. Making debt payments above what is required can eliminate the debt faster and save interest, but you should always consider the opportunity cost of that extra payment. Could that money be more effective in protecting you or your family through insurance? Could you be missing out on the miracle of compound returns on your investments? What’s appropriate for you?
5. Reorganizing or optimizing your debt strategy can sometimes free up cash flow for other planning needs, or keep you from ringing up high-interest debt. It’s worth at least exploring.
6. Beware of offers that entice you to borrow on credit cards at a low rate for a limited time. The offer isn’t what you think it is, and can do significantly more harm than good.
7. Ensure that you review your debt strategy regularly. The more complex or worrisome your debt structure, the more often you should review it.
8. Interest rate is not the only factor to consider. There are seven main factors to consider, and what appears to be a low rate can sometimes cost you more overall.
Your financial advisor can help you in this area. Even if you feel that you’re on top of it, have your advisor review it. There may be tweaks that can save you money or provide opportunities, and at the very least, your advisor can coordinate your strategy with the overall plan.
Make sure that both sides of your balance sheet are in harmony.