Is There Such a Thing as Good Debt?

Hey there,

Does it ever seem like the wealthy have some secret formula that’s hidden from the rest of us? Lean in close, because the best-kept secret of the rich is a single word: Debt. That’s right — you don’t have to actually own money to make money if you’re smart about it.

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Now, hold on! Debt as a gateway to riches? That sounds like going for a swim with a lead life preserver! Just think about all the businesses affected by COVID-19 and how much harder it was for those with lots of debt. But wait — we’re talking about bad debt here, and there’s a big difference.

Bad debt is the kind that drags you down — like credit card balances, loans for luxury items, or any debt that doesn’t generate value. But there’s another side to this coin: Good debt. Good debt is the kind that can actually accelerate your dreams and open doors to new opportunities. It might seem surprising, but there’s a reason debt has been around since ancient times, even before money itself.

According to David Graeber in his book, Debt: The First 5,000 Years, debt was what made civilizations possible by allowing people to trade and interact economically in ways that bartering never could. Debt, in its most beneficial form, made it easier to track who owed what to whom, fostering growth and economic development.

But what does this mean for you? The difference between good and bad debt often comes down to what you’re borrowing for. Conventional wisdom says good debts are incurred for things expected to increase in value over time, like buying a house or starting a business. Bad debts are those that don’t, like a vacation or a fancy dinner. While most of us may carry some bad debts, these typically limit our ability to build wealth.

The conversation around debt can be polarizing. On one side, you have Robert Kiyosaki, who advocates for using “good debt” to build wealth. In his bestselling book, Rich Dad, Poor Dad, Kiyosaki promotes the idea of investing with Other People’s Money (OPM). He claims that good debt is a way to build something out of nothing and has used it to build a massive real estate portfolio and multiple businesses. Critics point out, though, that he has “good-debted” himself into bankruptcy on a few occasions and that he profits from encouraging others to use debt.

On the other side, there’s Dave Ramsey, who preaches that “good debt” is an oxymoron. On his syndicated radio show, he often says, “Debt is dumb, and cash is king.” Ramsey advocates for having no debt of any kind — not even a mortgage. This view makes sense, considering his personal experience of losing it all due to over-leveraging with debt. To him, debt is something to be avoided, much like someone recovering from substance abuse might avoid drugs or alcohol.

So, which approach should you take? It depends on your personal values and risk tolerance. Here are two questions to consider:

1. How does your spending change with debt? We’ve found that many people tend to spend more on a payment plan versus paying for something in full. Indeed, research suggests that for most, it’s natural to let spending creep up a bit if it’s purchased on debt instead of in cash.

2. Is the risk worth the reward? The benefits of using debt can be life-changing, but debt always carries risks. When opening a small business years ago, we considered taking out a small business loan, but the risks seemed bigger than the possible reward of fast-tracking our venture. We opted to grow slower, but with less risk.

In the end, debt isn’t inherently “good” or “bad”; it’s a tool. The “right” approach to debt is ultimately personal and depends on your specific situation. Proceed carefully, remember there is no free lunch, and take things slowly so you can learn as you go.

And that’s our two cents!

Thanks for reading, and if you’d like to dive deeper into topics like these or share your own experiences, we’d love to hear from you. Join our community, and let’s keep the conversation going.