We’ve all heard the conventional wisdom: save your money, pay off your debt, and live debt-free. I believed this narrative for years. As a former financial advisor, I preached this gospel religiously to my clients. But what if I told you this approach might be keeping you broke and preventing you from building real wealth?
My awakening came when my own father asked me to help him retire. He had done everything “right” – paid off his house, eliminated all debt, and diligently saved in his 401(k). He was the perfect example of what I had been teaching clients for years.
But when I ran the numbers, the truth hit me hard. Despite all his discipline and sacrifice, if he retired then, he’d run out of money in about five or six years. All that penny-pinching had led to a dead end.
The problem wasn’t that he had debt – it was that he didn’t understand how to use debt as a tool for wealth creation.
Understanding Good Debt vs. Bad Debt
Let’s clarify something important: debt isn’t inherently evil. What matters is how you use it. I have a friend named Sam who proudly announces he’s $30 million in debt. Most people would gasp at this figure, but here’s the crucial detail – he owns $50 million in assets.
This means Sam has $20 million in equity and generates hundreds of thousands in monthly passive income. Is Sam really in debt? Technically, no. Debt is negative equity. Sam has positive equity and cash flow.
Consider this distinction:
- Consumer debt – Borrowing money to buy things that decrease in value (credit cards, car loans)
- Producer debt – Borrowing money to acquire assets that generate income and appreciate (investment properties)
The first type keeps you poor. The second can make you wealthy.
How Banks Use Your Money
Banks understand this principle better than anyone. When you deposit $10,000 in a savings account, that’s actually a debt on their books – they owe you that money plus interest.
Do banks panic about this debt? Of course not. They use your deposit to loan out ten times that amount. Your $10,000 deposit allows them to loan out $100,000. If they charge 10% interest on those loans, they make $10,000 annually while paying you perhaps 1% ($100).
Banks love “debt” because they know how to use it to create wealth. They’re not following Dave Ramsey’s advice, and neither should you if you want to build serious wealth.
Leveraging Debt for Wealth Creation
When I buy an investment property with 20% down, I’m using the same principle. If I purchase a $100,000 property with $20,000 down and it appreciates 10% in a year, that’s a $10,000 gain.
But my return isn’t 10% – it’s 50% on my invested capital! Why? Because I only put in $20,000 to control a $100,000 asset. That’s the power of leverage.
Even better, my tenants pay down the mortgage while the property (hopefully) appreciates. This combination has given me returns of hundreds of percent on some properties over the years – far outpacing anything I could have achieved in the stock market.
This is why I’ve had properties over the last seven or eight years that have returned hundreds of percent annually when you factor in:
- Cash flow from rental income
- Mortgage principal reduction (paid by tenants)
- Property appreciation
If I could go back in time and tell my younger, penny-pinching self one thing, it would be this: stop fearing debt and learn to use it as the powerful wealth-building tool it can be.
The wealthy don’t avoid debt – they master it. They understand the difference between debt that makes you poor and debt that makes you rich.
So before you pour all your extra money into paying off your mortgage early or celebrating being completely debt-free, ask yourself: am I making the same mistake my father did? Am I missing opportunities to build real wealth by misunderstanding debt?
The answer might just be worth millions to your future self.
Frequently Asked Questions
Q: Isn’t all debt risky? What if the market crashes?
While all investments carry risk, strategic debt on income-producing assets is different from consumer debt. The key is ensuring your investments generate enough cash flow to cover payments even during market downturns. This is why I focus on cash-flowing properties rather than speculative investments. Remember, during the Great Depression, the problem wasn’t debt itself but using borrowed money for stock market speculation.
Q: How do I know if I’m using “good debt” or “bad debt”?
Good debt helps you acquire assets that generate income and/or appreciate in value. Ask yourself: “Will this borrowed money make me more money than it costs?” If you’re borrowing at 5% but the investment returns 10% consistently, that’s productive debt. If you’re charging vacations or depreciating items on credit cards at 18% interest, that’s destructive debt.
Q: What about the peace of mind that comes with being debt-free?
Peace of mind is valuable, but it should be based on financial reality, not emotion. My father had the “peace of mind” of being debt-free, but faced the stress of insufficient retirement funds. True financial peace comes from having abundant cash flow that exceeds your expenses, whether you have strategic debt or not. Focus on building income-producing assets first.
Q: How much leverage is too much when investing in real estate?
The right amount varies by individual risk tolerance and market conditions. I generally recommend ensuring each property has positive cash flow even after accounting for vacancies, repairs, and other expenses. Never leverage to the point where a minor market downturn would cause financial distress. Start conservatively, build experience, and increase leverage as your knowledge and portfolio grow.
