For many young professionals, debt is already part of life. Between student loans, car payments, and credit cards, it can sometimes feel like you’re in the red right out of the gate.
You’re not the only one who feels this way. Debt often gets a bad reputation in personal finance. Society teaches us that most debt is bad debt and that we should be ashamed of it. We learn that debt is a burden, and we should strive to eliminate it as quickly as possible.
For this reason, we don’t talk about our debt as much as we should in our social circles. Even in school, we aren’t taught that instead of being ashamed of our debt, we can use good debt to get out of bad debt and become richer.
Instead of avoiding debt altogether, the rich know how to borrow wisely, invest in appreciating assets, and generate returns that exceed the cost of borrowing. They borrow money not for consumption, but for investment.
The good news? Even if you already have debt, you can still shift your mindset and take a page out of their book.
Good Debt vs. Bad Debt
The first step in using debt to get richer is learning the difference between good debt and bad debt.
Good debt is money that you borrow, which increases your earning power or builds wealth. This includes a student loan for a degree that will increase your earning power, a mortgage for a rental property, or a business loan for a side hustle.
Bad debt refers to any consumer debt that typically carries a high interest rate. Think high-interest credit cards, car loans, and speculative loans that drain money and finance items that depreciate over time.
If you are reading this, chances are you already have student loans or some other kind of debt to your name. Even if you already have bad debt, there is no need to panic! The goal is to reframe your ideas and belief systems about debt and become familiar with a few different kinds of good debt, which we will preview below.
Mortgage loans to invest in real estate
Investing in real estate has long been regarded as one of the most reliable ways to accumulate lasting wealth. Mortgage loans are a great example of good debt.
The rich often use mortgage loans to purchase real estate that appreciates in value over time. As the mortgage loan is gradually paid down, the property’s market value often rises.
This creates a growing gap between the property’s market value and the remaining loan balance, known as equity. Rising equity can be a significant driver of long-term wealth.
Beyond appreciation, real estate can also generate ongoing income. Rental properties, for example, often provide steady cash flow. Rental property owners use rental income to cover mortgage payments and property expenses, and can often profit from their rental properties.
This combination of equity growth and passive income is why real estate is such a popular vehicle for wealth building.
That said, real estate investing is not without risk. Markets fluctuate, property values can decline, and unexpected expenses from costly repairs and vacancies can burn through returns on your investment. Due to these uncertainties, consider getting a mentor or financial advisor before taking on a mortgage loan for real estate investment purposes.
Business loans to invest in an established business
Another way the wealthy use debt to grow wealth is through business loans. Instead of starting a company from scratch, they often buy businesses that already have loyal customers, strong management and operations, and a steady cash flow.
This allows them to begin generating returns on their investment from the first day, without the risks and uncertainties associated with building a business from the ground up.
Business profits can then be used to pay off the business loan, while still leaving money available for reinvestment. Many successful investors employ a rinse-and-repeat strategy: acquiring more businesses, expanding operations, and building a growing portfolio of income-producing assets.
You may have heard the phrase: “Leverage other people’s money – not your own – to get rich.” That’s exactly what this strategy illustrates. By leveraging borrowed capital, the wealthy minimize their own financial risk while maximizing their growth potential.
Borrow, buy, repay, reinvest. This cycle serves as the blueprint for leveraging debt to get richer.
Using debt to start or grow a business
Business loan debt isn’t just a tool for buying an existing business. It can also support growth and innovation in start-ups and newer businesses. Many entrepreneurs take out business loans to expand their operations, launch new products, or enter new markets.
With a well-thought-out strategy, borrowed capital can serve as a springboard to help a business scale more quickly than it would through organic growth alone.
A business loan investment in a new business can be used in many ways. Here are some of the most common:
- Startup costs
- Business registration, licenses, permits
- Legal and accounting services
- Logos, website, and branding
- Equipment and technology
- Tools or vehicles needed to operate
- Computers, software, and point-of-sale systems
- Inventory and supplies
- Purchasing raw materials or goods to sell
- Maintaining stock levels to meet customer demand
- Operations and staffing
- Renting or leasing office, retail, or warehouse space
- Hiring employees, paying wages, and training staff
- Covering everyday bills like utilities and insurance
- Marketing
- Digital marketing through SEO, social media, ads, and email campaigns
- Targeting new customers
Of course, this approach only makes sense if the returns outweigh the costs. Before securing a business loan, ensure that the projected profits from your business venture are sufficient to cover the loan repayment and still make a profit.
Education as an Investment
Student loans can also be considered good debt. When I was first deciding whether to attend law school, the biggest reason I didn’t want to was the financial investment and opportunity cost. I knew that attending law school would lead to a life-changing amount of debt.
It took a while for me to realize that student loan debt is an investment in myself, where I would become the appreciating asset.
Thus, student loans are good debt only when they lead to higher-paying careers or valuable skills in today’s employment market. For many, education is the first major investment they ever make.
Financing degrees or specialized training leads to gaining qualifications, knowledge, and expertise that can dramatically increase earning potential over time.
In fact, many wealthy people have built their foundations in this manner. They used education as a stepping stone to higher salaries, better opportunities, and eventually, the resources to invest in assets like businesses and real estate.
Principles the rich follow before taking on debt
The wealthy don’t just borrow money without considering the long-term effects and implications. They borrow strategically.
Before taking on debt, they weigh the risks, calculate the rewards, and ensure every decision aligns with their long-term financial vision. Here are a few guiding principles they follow:
- Monitor credit score and borrowing capacity closely
Your credit score is more than just a number. It determines how much you can borrow and the interest rate for a loan. The wealthy keep a close eye on their credit profile, ensuring they can access favorable loan terms when opportunities arise. Protecting and improving your credit ensures you’re in the best position to leverage debt wisely.
- Diversify investments
Wealthy investors rarely “put all their eggs in one basket.” Instead, they spread risk across various assets, including real estate, businesses, stocks, and more. Diversification means that if one investment underperforms, others can balance it out. Borrowing should be part of a broader, balanced portfolio strategy.
- Borrow strategically, avoid over-leverage
Debt can be a powerful tool, but too much of it can quickly go from good to bad. The rich carefully calculate how much debt they can take on without putting themselves in financial jeopardy. They borrow with purpose and only when they’re confident the returns will exceed the costs. They maintain enough liquidity to weather setbacks.
- Align borrowing with long-term wealth goals
Every loan taken on should serve a bigger vision: building assets, generating income, and creating long-term financial freedom. The wealthy don’t borrow for short-term gratification; they borrow to accelerate progress toward their ultimate goals.
By following these principles, you can approach debt the way the rich do: as a tool for growth, not a trap.
Wrap-up
The wealthy don’t fear debt. They master it. By focusing on good debt, leveraging assets, and borrowing strategically, they create opportunities for long-term growth.
To learn how the wealthy utilize debt to increase their wealth, begin by defining your financial objectives, evaluating your risk tolerance, and consulting with a trusted financial advisor. Debt can be dangerous if mismanaged, but when used wisely, it can accelerate your path to financial freedom.