Amazon lists over 40,000 personal finance books. While I haven’t read each one — contrary to what my kids think, I do (sort of) have a life — I am willing to bet that in the vast majority, the subject of debt gets far less attention than basics like how to invest in stocks and bonds.
That’s a mistake.
After all, a primary goal of mastering personal finance is to increase your net worth. And net worth is nothing more than a fancy term for the dollar amount of your assets minus all your debt.
That argues for getting a better handle on what you owe. Enter “Debt 101”(Adams Media, $15.99) by Michele Cagan, a certified public accountant who has written a book that could have been called “Debt 101.5” because she wants people to think about debt strategically as well as tactically.
Along with an excellent new primer on finance by Tina Hay — “Napkin Finance: Build Your Wealth in 30 Seconds or Less” (Dey Street Books, $25.95.) — Ms. Cagan’s book should be immensely useful to many people.
Strategically, Ms. Cagan’s position could not be clearer: “The key to successful borrowing is simple: Borrow money to buy assets that will gain value or produce income.” She calls that “good debt,” and it could include real estate — your home or rental property — and money needed for education. The goal of good debt “is to increase your fortune or your fortune-growing ability.”
“Bad debt,” by contrast, “eats away at your net worth and jeopardizes your current and future financial health,” she writes. High-interest credit card debt and personal loans to pay for vacations are examples.
Building on what you know
Those are the basics, of course. But where Ms. Cagan is particularly good is in providing ideas that maximize the effectiveness of good debt and minimize the bad.
For example, while borrowing to fund your education is good debt — because “it’s an investment in yourself and your future” — it can easily move into the bad debt category, as many have learned. Among those with outstanding student loans from their own education, 20 percent are behind on their payments, according to a Federal Reserve report issued last year.
“The dividing line that keeps student debt in the good category involves the amount you borrow,” Ms. Cagan writes. “While most people ask ‘how much in student loans can I get,’ the right question is ‘how much in student loans can I afford to pay back.’”
Her rule of thumb? “Borrow in total no more than your realistically expected starting salary when you graduate.”
She offers similar advice when it comes to mortgage debt: Don’t take out the biggest one you qualify for, because it is bound to strain your budget.
She offers two other mortgage ideas I like.
First, say you love the idea of paying off your mortgage faster, via a 15-year mortgage, but are concerned about the substantially higher monthly payments — 35 percent to 50 percent more, according to Ms. Cagan — when compared with 30-year loans. Seek out a 20-year mortgage instead. (If you find that you can manage those payments easily, you can always add a bit and pay down the mortgage even faster.)
Second, say your current mortgage rate is relatively high. The average rate offered recently for a 30-year fixed-rate mortgage was 3.7 percent; for the average 15-year fixed, it was 3.15 percent, according to Bankrate.com. Refinancing is a project, and it involves fees. But, she says, you may not have to go through the trouble of refinancing.
The alternative? “Ask your lender to lower your rate,” Ms. Cagan suggests. “For borrowers with a perfect payment history and solid credit, lenders will often say ‘yes’ to this request so you don’t refinance with another company.”
I don’t know anyone who has done this successfully, but it strikes me as worth a shot — especially if your current mortgage rate is high. If you call your lender, and they see you have a high rate, it will probably be obvious to them that you will refinance elsewhere if they say no.
Dealing with the wrong kind of debt
As for bad debt, she concedes that credit cards are convenient, but she emphasizes that you need to understand that every time you use your card you are borrowing money. “You know that you’ll have to pay the bill eventually,” she writes, “but the promise of small minimum payments can make purchases seem like bargains.”
Clearly, if you pay off your balance in full, you have use of the credit card company’s money until the bill is due. But Ms. Cagan goes beyond that, offering specific tips:
“Credit scores rely heavily on utilization, the percentage of your available credit you’re using right now,” Ms. Cagan writes. “You’re best off keeping your utilization under 30 percent, both for your credit score and your overall financial health.”
These specific tips are among the relatively few she provides, alas. Ms. Cagan is so careful trying not to make readers who have substantial debt feel bad that she offers “things to consider” as opposed to hard and fast rules, which I would have preferred.
Still, Ms. Cagan’s book fills a void in the marketplace. Ms. Hay’s fills another.
With “Napkin Finance: Build Your Wealth in 30 Seconds or Less,” Ms. Hay has created an entertaining introduction to saving and investing.
Yes, of course, her subtitle is hyperbolic, but this is the best personal finance primer I have read in years.
Ms. Hay, a Harvard M.B.A. who founded a website also named Napkin Finance, covers things as diverse as investing and saving for retirement and cryptocurrencies, digital money that can be sent electronically. Bitcoin is probably the best known.
What I particularly like is that she handles most topics — like compound interest, that is, earning interest on your interest — in two or three pages, often building on the obvious.
The parentheses in the following are hers: “Compounding always speeds along your money’s growth (unless you withdraw your money instead of letting it continue to grow.) But three things can help turbocharge your compounding: a higher interest rate; adding more money along the way; giving your money more time to grow.”
And she includes topics not usually found in personal finance books, such as explanations of what the Federal Reserve does and definitions of common business terms such as a profit and loss (P.&L.) statement, “a company’s income and expenses over a period of time.”
In doing so, she typically manages to slip in a relevant fun fact. “The phrase ‘the bottom line’ comes from the P.&L. because profits are the last line of the statement.” That explanation sounds plausible to me. And throughout there are aphorisms such as “money can’t buy you happiness, but it is still better to cry in a Bentley than on a bus.”
Of course, if you are trying to cover the proverbial personal finance waterfront in less than 300 pages that are filled with easy-to-understand drawings and graphs, there are bound to be omissions.
That Ms. Hay omitted international bonds in her discussion of asset allocation is not surprising. But omitting index funds is.
Still, by simplifying personal finance, she may get people to want to understand more. If they do, they can learn not only about index funds but also the importance of getting a solid handle on their debt.