Debt Is a Tool
Most personal finance advice treats debt as the enemy. Pay it all off. Cut up the cards. Never borrow again. This is too simple.
Debt is a tool. Like any tool, it can be used well or badly. The question is not whether to use debt. It is whether the specific debt you are considering builds your financial position or destroys it.
What Makes Debt Good or Bad
Good debt is used to acquire an asset that appreciates or generates income — and costs less in interest than the asset returns.
Bad debt is used to fund consumption — things that lose value or provide no financial return — and costs more in interest than any benefit received.
Examples of Good Debt
A mortgage on an income-producing property — borrowing to buy a rental property that generates more income than all costs. The asset appreciates. Net worth grows.
A student loan that significantly increases earning power — a degree leading to a career paying substantially more than it would have without the credential. The caveat: the income increase must be real and significant.
A business loan that generates profit — borrowing to start or expand a business that generates more profit than the loan costs.
Examples of Bad Debt
Credit card debt — cards charging 18% to 25% interest. Consumer purchases depreciate immediately. Borrowing at 20% to buy something that loses value destroys wealth.
Car loans for depreciating vehicles — a car loses 20% to 30% of its value in the first year. Borrowing at 6% to 10% to buy a depreciating asset is bad debt — though sometimes necessary.
Buy-now-pay-later for consumer goods — these feel like free money but often convert to high-interest debt.
Personal loans for lifestyle expenses — borrowing for holidays, weddings, or electronics funds consumption with no financial return.
How to Evaluate Any Debt
Before taking on debt, ask three questions:
What am I getting in return — an appreciating asset, income, or consumption?
What is the interest rate, and does the return exceed it?
What is my exit — how and when does this debt get paid off?
If the return exceeds the cost and there is a clear repayment path, the debt may be justified. If it funds consumption with no return, it is bad debt — regardless of how the lender packages it.