Debt is a double-edged sword. On the positive side, borrowing is the best way to acquire certain assets, especially those that appreciate in value over time like real estate or a business investment. If the cost of the debt is less than the expected return on your investment opportunity, leveraging the investment purchase with debt is a textbook way to create wealth. Likewise, a cash windfall may be better employed as an investment rather than paying down debt if the expected return on the investment opportunity is higher than the after-tax cost of the existing indebtedness.
On the negative side, debt can become a devastating burden when used to finance the consumption of stuff, the purchase of depreciating assets or to fund a spendthrift lifestyle. With high interest rates, high fees and non-deductible interest charges, credit card debt is a sucker’s game that too many people play – it should be avoided at all costs, even if it means going without one. Likewise, using your home equity as a piggy bank to pay for items like a family vacation is not a savvy move. The consequence is that retirement savings gets shortchanged and important risk protection like life/disability insurance goes unaddressed.
Many folks have dug such a deep financial hole misusing consumer debt that it becomes difficult for even wealth professionals help them climb out. The ability to borrow when appropriate to achieve your goals or take advantage of financial or business opportunities is a privilege earned by carefully managing your debt and creditworthiness.
