Having a healthy fear of debt is good thing—it can ruin lives if it’s used recklessly. But debt can also create positive results when it is used responsibly.
Debt is a tool. Just like a chainsaw. Use it the right way, and you can clear a path. Use it wrong, and you can lose a leg.
Here’s what too many people miss: debt magnifies everything. It makes good decisions better—and bad decisions worse. If you borrow money to invest in something that drops in value, your losses can spiral out of control very quickly. On the flip side, the right kind of debt can create opportunities you wouldn’t otherwise have.
The Tax Code Actually Likes Debt
There are two unique advantages to debt that don’t get talked about enough:
- You can deduct more than you spend.
If you borrow money and use it on a deductible expense (like a van for your business), you can often deduct the full amount—even though you haven’t actually paid it all yet.
- You get cash now and pay no tax on it.
Loans aren’t income. So when you take out a loan, it’s money in your hand without triggering a tax bill.
No other tool in the tax code works quite like that.
It’s Not All or Nothing
Some people treat debt like it’s either all bad or all good. I encourage thinking about debt in the context of real estate, business, and investing as a spectrum of risk. Think of it like using a turbocharger to make your engine more powerful. The right level will improve your speed and efficiency. Too much power will blow up your whole engine. In order to stay in a low-risk zone, we need to think about rates, payment structure, and most importantly, how we use the proceeds.
Use These Principles to Keep Debt From Blowing Up on You
- Variable rates can put you at risk.
The most common variable-rate loans you will see are business lines of credit
and home equity lines of credit. When interest rates rise, your payments will increase dramatically on these. Most business credit cards are also variable-rate. Most commercial real estate loans are presented as fixed-rate loans, but they’re actually on a 3-5 year balloon, which effectively makes them a variable rate. Being able to lock in an interest rate on a mortgage, vehicle loan, or equipment loan over the term of the loan is a lot less risky than a loan where you really don’t know how much it will eventually cost to pay it off. Future interest rates are unpredictable. Don’t put yourself in a bad situation by borrowing too much at variable rates.
- Borrow for appreciating assets, not depreciating ones. Think resale value.
Most land goes up in value. Cars don’t. Borrowing to buy something that drops in value the second you own it? That’s just locking in a loss. Financially savvy people typically only use debt to buy things like solid businesses or rental real estate. When you consider financing a business or other investment opportunity, it’s important to be really careful in doing your homework. Does the opportunity that you’re buying have a track record of cash flow success? How marketable is this business or real estate? And some things you can finance lose all their value immediately… A vacation or wedding might be a great experience—but there’s no resale value. If the investment generates enough income to cover all or most of the debt payments—rent, dividends, profit—that’s the best case, you’ve just lowered your risk dramatically.
- Always have financial reserves.
If you borrow money, you should have enough other assets to cover that debt—even in a downturn. Even if the investment goes south. Even if you lose your job. That’s your safety net. Without financial reserves, taking on debt can cause you to lose all you’ve got. If you use debt as a tool to help you buy things that you otherwise can’t afford, debt will just help you accelerate your spending. When you have plenty of assets, debt can provide that extra measure of financial flexibility without triggering gains on the sale of assets.
- Lower interest = lower risk.
High-interest debt (think credit cards) is toxic. Low-interest debt is much safer. First, you have to consider your credit score. Work to improve and maintain your credit score to qualify for the lowest possible rates. For most people, one of the best interest rates they can get is a mortgage on their primary home. Vehicle loans are also typically at a low interest rate. Unsecured business loans typically carry a slightly higher rate because they involve more risk. Watch out for high rates on consumer financing like Klarna. They usually have a short, low-cost period and then they get expensive. If your only options are high-interest rate debt, you’ll probably regret borrowing in the long run.
- Compare your payments with your available cash flow to make those payments.
If the investment generates enough cash—rent, dividends, profit—to cover all or most of the debt payments, that’s the best case, you’ve just lowered your risk dramatically. This is why you sometimes want to structure your loan over a longer period so that you can get the payments low enough for the cash flow generated to cover the payments. But don’t just count on the cash flow from one source. Make sure that you have enough overall cash flow to pay this along with all your other debt payments. If your business or investments have a history of steady excess cash flow, you aren’t being reckless to some debt to accelerate your next investment.
Where People Get Into Trouble
When people aren’t familiar with the principles above, they have no framework to understand when debt might be a responsible option. But even when you understand these principles, you can get tripped up because you forget to plan for the curveballs.
Don’t assume everything will go as expected. It won’t. Here are the common blind spots:
- Losing your job or main income source
- Losing renters or tenants in an investment property
- Big, unexpected repairs
- Property values dropping
- The market crashing
- Business income shrinking
When the economy turns—or your situation changes—and you’re overleveraged, it’s not a slow bleed. It’s a cliff.
So When Is Debt a Good Idea?
Ask yourself:
- Am I using this to acquire something that holds or increases value?
- Can I still sleep at night if this investment doesn’t pay off right away?
- Do I have enough other assets to ride out a downturn?
- Is the interest rate reasonable?
- Does the investment pay for itself?
If you’re answering yes to most of those, then the debt is likely a calculated risk—not a reckless one.
Final Thought
Debt is powerful. But like anything powerful, it needs to be respected. When you use debt to make a purchase, you need to be twice as careful in your decision making. You also need a clear plan for how you’ll pay it back even if things go sideways.
Use it right, and debt can give you options. Use it wrong, and it’ll box you in.
So be smart. Don’t count on the best-case scenario. And don’t let a tool become a trap.