Only Get Debt That Give More Value Than the Cost

DebtAmerica is addicted to debt. There’s $12.29 trillion in household debt just through till the second quarter of 2016. I can’t imagine what the amount is now. It’s not just the consumers who are in debt, the government is too, with an estimated $19 trillion in debt by the end of FY 2016. The government’s Federal Tax revenue is an estimated $3.3T. An almost 6x income to debt ratio is not sustainable and who knows what will happen when a recession happens. The government is living on the edge of a cliff and it only takes a small blow of wind that will push it over and wipe out everything.

I personally hate debt. I have $5,500 in subsidized student loans (I’m keeping this until December because I’m not paying any interest on it until my grace period is up, which is this upcoming December. The debt will be entirely paid off and I did not use leverage to finance my car. However, there’s an upside. I believe that debt can be a great way to propel yourself up, if used properly.

Leveraging Leverage to Your Advantage

Not every debt is evil. Mortgages, car, and student loans are fantastic ways to propel yourself forward in your personal finance pursuits. I’m a big fan of allocating resources, whether it’s time, money, or energy, to the highest value adding activities. A house gives you comfort and safety.

Nissan Car
Use this to your advantage

A car provides transportation. There’s a huge value in having transportation in that you can get to work to produce income. It also helps with saving money and optimization by being able to make weekly trips to the grocery store instead of going to the nearest convenience store and paying a premium for convenience. 


Student loans give you the power and credentials to give yourself a better salary and optionality than if you hadn’t gone to college. Going to college can be a better choice than working after high school as the world is becoming more advanced and high tech. The networking opportunities that college provides don’t hurt, either.

The wage differential between a non-college holding person than a college holding person is widening. Just by going to college and paying attention in classes to get good grades provides more opportunities than someone who hasn’t done so. It’s when you’re given a chance to prove your work ethic.

These debt allow you to propel yourself forward than if you hadn’t taken them. I would call them almost necessary. The problem comes knocking in the door with the well alluded Bruno with a baseball bat when unnecessary debt is taken in.

Unnecessary Debt

Toy Soldier
This is what money is

The problem comes when you add unnecessary debt to your arsenal. Money are soldiers that can work hard for you to keep your kingdom afloat and alive. If misdirected, the soldiers are not shy about bringing back the troy horse that will lead to your downfall. Once bad debt breaks out from the horse, you’re going to be fighting an uphill battle.

Total household debt equaled $12.29T, which isn’t a bad number if it’s taken on to buy high value generating activities or products. It becomes bad when the one of the highest increases came from credit cards. Credit card debt increased by $17B dollars. That’s a lot of dollar bills, given that a million dollars is a lot of $’s already

I personally LOVE credit cards. I can’t believe that I can take almost 2 months to pay off something that I bought. For example, if my statement ends on the 15th of August and I buy something on the 16th, then I don’t have to pay it off until October 14th. This significantly helps my cash flow numbers. It’s powerful to have the ability to pay it off later.

However, credit cards are ONLY awesome if paid off in full every month. For me, it’s set on Autopay so that I never forget to pay off my credit cards in full. I paid $0 in interest ever since opening my first account 2.5 years ago. I have 5 credit cards with different rewards categories totaling a $30,000 credit limit. It’s scary to think that I have the power to spend $30k in one month, which is why I practice discipline.

Only Use It When It Generates Value

Debt is an excellent tool to catapult your personal finance to where you want it to be. Having transportation, extra education, or a house can allow you to earn more money and cut expenses depending on how it’s used. Not every debt is a solder inside a troy horse waiting to burn your kingdom down that you worked so hard to create. It can be a blessing in disguise IF used correctly. 

The next time that I make a big purchase will be when I buy a house. Since a house is an appreciating asset, I can’t follow my rule for making a big purchase (which I recommend everyone to do for depreciating assets). However, I will practice smart buying strategies and after doing a lot of research, will take on a mortgage to purchase the house. I’m following a couple of turnkey property blogs currently and looking to educate myself in real estate. One blog that I recommend is Cash Flow Diaries.

A house is a great product to take on debt for because I can produce income from it by renting it out. Transportation gets you to work which gives you income. Student loans give you income because of the higher earning potential. If you are taking on leverage to produce more indirect or direct income WITHOUT RISK, then it’s smart debt to take on. If the debt produces more income for the creditor than you, it’s unnecessary. 

Don’t Lever Up Too Much

Taking on debt to buy a car, house, or an education is a good bet because the value is realized WITHOUT risk. A car gives you transportation, a house gives you a space to sleep, and an education gives you thinking skills. You realize the value of the product without any risk. Those attributes are what makes it worth taking on debt.

When risk is involved, do NOT use leverage for huge purchases (such as a rental property) unless 1) You know what you’re doing and 2) risk is mitigated. Taking on a lot of debt can cause you to have significant financial distress. Try to avoid risks where you put everything on the line where a coin decides your future. Heads you make it big and tails you lose it all. It’s almost gambling if you take on this kind of risk.

I’m not using the cash I have right now to buy a house because I’m not educated in real estate. I want to put in as much preparation as I can before exposing myself.

Be a Subject Matter Expert

Educate Yourself
Educate Yourself

You have to be a subject matter expert in a capital intensive business. Why? Competition is out there every day looking for ways to beat you. There’s always going to be someone out there who’s looking to take your business away from you. And guess what? Competition is both ethical, legal, and encouraged.

Limit your risk as much as possible and come up with your own cash to pay for the ventures. How do you limit your risk exposure? Create side income opportunities to come up with the cash. Save everything that you possibly can to come up with the money. Waiting a few extra years to start your venture with no risk is better than starting one right now with an unbearable amount of risk. 

Don’t let debt be the reason your dreams are shattered. If you took on debt and want to get out, it’s never too late. Life is a marathon and you can dig yourself out anytime you want!

Readers, what do you think about debt? Do you use debt to go forward or is it setting you back? Let me know in the comments below! 

Finance Solver

I grew my net worth to $40,000 as a college student through hard work, discipline, and a little bit of luck. I graduated college in 2016 and will be starting to plan for my retirement once I start working.I am planning on reaching financial independence by my early 30's and I will document my moments of inspiration all the way to desperation here.

My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!

Read more about me here.

Latest posts by Finance Solver (see all)

24 thoughts on “Only Get Debt That Give More Value Than the Cost

  1. I would say if you can avoid debt for a car or pay it off quick is better. While I have paid off all my vehicles early 6 months was my last truck it was the latest. But I have had that truck for 13 years.

    • Finance Solver says:

      Yep, but at times paying off something straight cash isn’t always possible. Paying your car off early definitely is not a bad idea! I’m planning on using my car for the next 10 years, hopefully it doesn’t break down until then.

  2. You’re spot on when you say that debt is worthy only when it gives you back more than you pay for. There are obvious choices when debt is needed for income producing assets like a rental property, an investment in a business or education.
    But I’ve never felt comfortable with debt associated with cars for example. In some cases it makes sense to borrow for a car and invest the difference, but I’ve always paid cash. Since it only depreciates, better to limit the losses from day 1.
    Students loans scare me a little. For the same reasons that it’s completely worthy for good education, these costs & loan amounts can keep going higher for a very long time…

    • Ah, I definitely don’t advocate taking on debt to pay for a car if it can be paid off with cash, I agree, since it’s a depreciating asset, better to limit risk exposure whenever you possibly can!

      I’m scared at how fast student tuition is increasing as well. It’s certainly rising faster than real income increases and that’s so scary. I went to a state public school that had great value so I was able to not spend as much as I would have if I hadn’t done that. Online education can’t come fast enough!

    • Debt can certainly be a great arsenal to have under your belt! If it’s used correctly.. Overleveraging is definitely too risky to do.

      No problem at all! I’ve just been enjoying reading your blog so keep up the great work 🙂

    • Definitely some great stuff here! I agree with Alexander here and follow his blog too. I leveraged the equity in a rental property that was paid off to buy a small apartment complex. I wouldn’t leverage too much, but it has definitely paid off!

      • Finance Solver says:

        Rental income is such a great passive income way! I’m still impressed at how you were able to lower the vacancy rate to be a very low number. My parents are having a hard time finding tenants for their house and they had to decrease the rent to get a tenant in an inflation environment. It doesn’t help that they are in another side of the world but have to make do with what we can!

    • Finance Solver says:

      Yep, it’s all about how one uses it! I love taking on debt to make a purchase if it makes sense to. Debt can be a fantastic tool.

  3. Nice write up FS! I agree, there’s good debt and bad debt. Some people despise debt all together and avoid it at all costs. I think if you have a very low debt to income ratio, then leverage can certainly be used to your advantage and even maximize your returns. That’s why I use leverage on my real estate deals, which at the end of the day, is an income producing asset. Financing a vacation to Hawaii on credit cards on the other hand…bad debt.

    • Finance Solver says:

      Thanks OB! It’s definitely called leverage for a reason. It can hurt or help you, everything depends on how it’s used.

      I am planning on buying a property in the next 5 years so I will have to tack on leverage to make sure that I’m able to buy. Spending the next 5 years getting educated in the real estate market by talking to a lot of people and books!

  4. I think if it’s a sensible investment in your financial future, leaves you better off in the long-term and in no way impacts negatively on your overall financial position you can consider it a good debt. I also love credit cards, I get so many rewards it actually pays me!

    • Finance Solver says:

      I agree completely! The point is to limit the risk so that the debt becomes riskless. The 5500 worth of student loans that I’m holding is riskless because I can pay it off without paying any interest. The key is discipline to not over leverage!

  5. You’re right SF, debt is only worth it if it dramatically increases your income, or the thing you’re paying will continue increasing in price (eg a house).

    We’re taking a very anti-debt approach with our lives. Ultimately, debt is a drain on our cashflow, so I think the only debt we’ll ever have is a mortgage. Not having any debt forces us to completely live within our means.


    • Finance Solver says:

      It’s also worth it if it increases your income WITHOUT risk. If it increases income without risk, then it’s certainly a no brainer (like my subsidized student loans, I won’t pay any interest on it when I pay it off in December and I used it to get risk free returns).

      That’s a great way to live. I can’t wait until the 15th of this month which is when most of my credit cards will be paid off. I hate looking at the fact that I have a balance in my credit card because I always wait until the last day allotted to pay off my card in full and my credit card statements have been chock-full of one-time costs. Love to see that number to be a low one!

  6. I agree that debt in not necessarily “evil” and it has helped us build up our net worth faster. It is about making sure that debt can be serviced no matter what happens and like you said making sure you are getting good value for taking on that risk.

    • Finance Solver says:

      Debt can be the gasoline that ignites your personal finance rocket to where you want to go. If the debt can be paid off without paying any interest, it’s a risk-free debt and certainly one that I am comfortable tacking on!

  7. This is a refreshing take on debt, FS. Most of the time, a blog post about debt only considers the typical, one-sided argument that debt is all bad. Leveraging debt wisely can be a reasonably wise proposition, even if it is inherently a risk.

    For example, I took out student loans for my MA rather than cash flowing it so we could buy our first home at the same time. Sure, this was a risk. But less than two years after finishing my degree, our house had appreciated by almost double the cost of my degree, the student loans are paid for, and my income increased more than the overall cost of my degree.

    • Finance Solver says:

      Thanks FS, I appreciate you swinging by and leaving a comment! I wanted to take a different spin to debt and believe that debt can be a great tool, and like any tools, if it’s used correctly, it’s great.

      Whoa I did not know that. Great story on taking a little bit of smart risk to achieve great results. Bet you don’t regret taking on that debt for one second now!

  8. I love the title of your post Only Get Debt That Give More Value Than the Cost. I feel like too many people utilize debt for immediate gratification and don’t take enough time to think about how much the item will cost making the minimum payment on their credit card.

    While I personally abhor debt I realize it’s a great tool and can make a lot of financial sense in certain situations. Look at Mark Zuckerberg, CEO of Facebook, he has a 1% mortgage because he can make more money investing in T-Bill.

    Once again great article

    • Finance Solver says:

      Thanks MSM! I wanted to stress that debt isn’t always a bad thing, but can be a good thing IF used correctly. For example, credit cards are fantastic if used correctly because it gives so many rewards and can help with your cash flow because they give that 1 month gap to pay it off. I lose using credit cards.

      Whoa I had no idea that he had a 1% mortgage. That is a really great deal and can give a lot of arbitrage opportunities in the market.

      Thanks for stopping by!

  9. Hi FS,

    Debt when leveraged effectively with caution and proper risk mitigation measures, is an awesome way to make money.

    Investing in rental properties where the rental income pays all the bills and leaves you with a positive cash flow is the most straightforward example.

    I am a fan of Cash Flow Diaries. Historically, I have been a stocks and bonds guy, now looking into real estate.


    • Finance Solver says:

      It is, but it can also be an awesome way to lose money as well. If I buy a stock for $1000 while having $1000 student debt and get a return of 8% vs. someone with $1000 in cash but no debt and they get an 8% return, I basically took on an additional risk to get the same return. It’s different for buying on margin, though!

      I agree! Using leverage in real estate is practically necessary (not a lot of people can put up 6 figures to buy a rental property). I was referring more to the prior example scenario, however.

      I’m a huge fan of Cash Flow Diaries as well. Alex really knows what he’s doing and I like following all of his business ventures.

      Thank you so for stopping by and leaving your thoughts!

Leave a Reply

Your email address will not be published. Required fields are marked *