Debt—it’s a word that evokes stress, sleepless nights, and a gnawing sense of financial captivity for many. Yet, for others, debt is a tool, a ladder to wealth and financial freedom. How can something so universally present hold such drastically different implications for our lives?

The truth lies in how you manage and perceive debt. While some debts quietly rob your future self, others act as a lever, helping you build wealth faster than you could on your own. The key is understanding the difference and crafting a strategy that aligns with your financial goals.

The Problem with Conventional Wisdom

You’ve likely heard it before: “Get out of debt as quickly as possible.” Financial gurus like Dave Ramsey champion the idea that all debt is bad and should be eliminated before you even think about investing. While this advice appeals to our instinct to avoid risk, it ignores two of the most powerful levers in personal finance—time and leverage. The earlier you invest, the greater the potential for compounding to work its magic. Also the strategic use of loans and other people’s money can build wealth and catapult your financial future to new levels.

I will be writing a series of posts on debt that will challenge these old-school ideas and offer you a roadmap for not only eliminating debt but also building wealth simultaneously. Whether you’re weighed down by student loans, credit cards, or a hefty mortgage, there’s a smarter way forward—one that doesn’t require you to pause your dreams of financial independence.

Good Debt vs. Bad Debt

What is Good Debt?
Good debt is like a business partner: it works for you, not against you. It’s the kind of debt that allows you to leverage other people’s money (OPM) to grow your wealth or build your net worth, much like utilizing Premium Finance. Think of it as a tool—one that requires skill and strategy to wield effectively.

Classic examples of good debt include:

• Mortgages: Owning property that appreciates over time, especially if it generates rental income and offers tax incentives.
• Business Loans: Borrowing to expand operations, increase production, or enter new markets.
• Student Loans (for High-ROI Degrees): Financing education that leads to substantial long-term income growth. Degrees for engineering, law school, or medical school are examples.

Good debt isn’t about avoiding interest altogether—it’s about ensuring the returns outpace the cost. What if you could borrow money for an investment that earned 7% returns, but only had to pay back 4% interest. How much would you borrow? Your answer should be “as much as I can get.” This is called arbitrage. It’s a discrepancy in pricing that allows you to make a positive 3% return on your investment without taking on unnecessary risk. Let’s look at a few examples of individuals utilizing good debt to create more wealth. 

Case Study 1: Susan’s Business Loan
Susan, a small bakery owner, took out a $50,000 business loan to open a second location. By year three, her profits had doubled, far exceeding her loan repayment costs. Not only did the loan accelerate her business growth, but it also allowed her to create more jobs and establish a stronger community presence.

Case Study 2: Mike and Lisa’s Mortgage
Mike and Lisa purchased a duplex for $300,000 with a $60,000 down payment and a $240,000 mortgage. They lived in one unit while renting out the other. The rental income covered the mortgage, and within five years, the property appreciated to $400,000. Their equity grew by $160,000, all while their housing costs were effectively zero. Mike and Lisa also enjoyed tax incentives from their mortgage interest. 

What is Bad Debt?
Bad debt, by contrast, is the silent thief of financial freedom. It’s any debt that takes money out of your pocket without giving you anything valuable in return. Bad debt doesn’t work for you—it works against you, trapping you in a cycle of interest payments that benefit the lender more than yourself.

Common examples of bad debt include:

• Credit Card Debt: With interest rates often exceeding 20%, unpaid credit card balances grow exponentially, making it nearly impossible to catch up.
• Personal Loans for Lifestyle Purchases: Borrowing for vacations, luxury items, or non-essential expenses creates a financial burden without yielding future income.
• Auto Loans: Cars are depreciating assets. The moment you drive one off the lot, it loses value—leaving you with debt tied to an asset worth less than what you owe.

Case Study: The Cost of Credit Cards
Jessica, a 30-year-old marketing professional, carried $15,000 in credit card debt with a 22% interest rate. By making minimum payments, she realized it would take her nearly 30 years to pay off, with $25,000 in interest alone. Her wake-up call came when she calculated that the same $15,000 could grow to over $100,000 if invested instead.

The Gray Areas of Neutral Debt
Not all debt falls neatly into good or bad categories. Neutral debts, like student loans or car loans, can swing either way based on how they’re managed. For example:

• Student Loans: A physician borrowing $200,000 to attend medical school may still see a positive return on investment (ROI) with a high salary post-graduation. On the other hand, borrowing the same amount for a degree in a low-paying field can lead to financial hardship.
• Auto Loans: Financing a car for business use might be justifiable if it’s essential for your work and generates income. However, taking out a seven-year loan for a luxury car you can’t afford puts you squarely in bad-debt territory.

Good debt grows your net worth or income; bad debt drains it. Neutral debt requires careful consideration of the potential ROI and the associated risks. Knowing the difference is the first step toward crafting a smarter financial strategy. In the next post, we’ll examine why paying off all debt before investing is a missed opportunity.