The Landings & Bay Colony

18

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n today's investment environment, it's
more important than ever to make sure

that all facets of your financial plan are
working efficiently. Let's explore the
liability side of your balance sheet and
discuss how access to strategic financing
solutions can help keep you on track to
achieving your goals.

Take a careful look at your entire financial picture in terms of
the four pillars of wealth planning: protecting assets from
catastrophe, being smart about debt, building wealth and
planning for both the expected and the unexpected. If you’re
like most people, you probably place the least emphasis on
the debt side of your balance sheet. However, it is equally
important—especially now. Making sure you structure your
debt to your benefit may have seemed less important when
your portfolio was achieving double-digit returns, but in
today's environment, it matters more than ever.

There are many good reasons to incur debt—to purchase a
home or vacation property, to start or expand a business
or sometimes simply because you believe you can obtain a
return on those borrowed funds that’s greater than the cost
of the loan. What's important to remember is that taking on
debt should help support your ability to achieve a goal, or
at the very least, not compromise your capacity to attain it.
For example, prior to taking on debt, you should ensure
that it will not threaten you immediate cash flow or your
long-term plans for retirement or hinder your ability to fund
your child's education. Intelligent planning requires that
you only take on debt with a full understanding of its
potential benefits and risks, and that you structure it wisely.

All debt is not created equal

As a matter of practice, you place your assets into
categories, for example, cash, bonds and stocks. This helps
balance what you want those assets to accomplish and
ensures that your overall portfolio reflects your risk
tolerance. But what about your liabilities? You allocated
your investment portfolio, and often neglect your "debt
portfolio." It's just as important that you understand your
allocation among the various kinds of debt:

• Unsecured debt like credit cards, which can carry high

interest rates and is often structures so you pay interest
first, retiring the debt slowly

• Secured debt on depreciating assets, generally

associated with loans to purchase items that will decline
in value over time, such as cars or boats

• Secured debt on appreciating assets, typically collectibles

like art and other treasures or a residential mortgage

• Secured debt on income-earning assets, usually

associated with the purchase of an investment property
that provides rental income in fact, when Wall Street
analysts research a company to determine if it's an
attractive investment, they look very closely at its level of
debt, its structure and its cash flow. This is because too
much debt, or poorly structured debt, can undermine the
viability of a business. 

As an investor, it is also important to evaluate your level of
debt, its structure and how this affects your cash flow. The
analysis includes a review of these important aspects and
measures of debt:

• Total debt service ratio, calculated by dividing all debt

service payment by gross income; lenders usually fix a
manageable ceiling at 40%

• Interest vs. principal payments.Whether payments are

primarily going toward interest or principal will greatly
impact your debt service ratio

• Total debt ratio, which represents your total liabilities

divided by your total assets

• Current-to-total liabilities, reflected by how many of your

liabilities are due in the next 12 months; generally the
higher that ratio, the more problematic, as your situation
would be adversely impacted in a rising rate
environment if you needed to refinance

Put your debt to work for you

The key objectives of an effective liability management
plan are to reduce overall debt, optimize the cost of
borrowing, and manage the risk of interest rate fluctuation.
How could you improve your debt portfolio? Lower interest

Financially Speaking

New Ways to Think About Your Debt

by Darran Blake, Sr. Vice President-Wealth Management, UBS Financial Services