There is a lot said on social media about how the rich use debt and that’s what rich people do to avoid taxes, etc. Let’s break it down remembering that these principles apply whether personal or business.

The good:

Using debt as a form of arbitrage can be a great way to increase wealth. For instance, when mortgage rates were 2.5% a lot of folks did cash out refinances or equity loans in order to use the money to make investments or to buy other properties that would generate greater than a 2.5% return. This is a great use of debt and is indeed what “the rich people” do. Investing in your own business when rates are low is a great idea provided your business will generate a greater return than the cost of borrowing (if your business isn’t generating greater than a 2.5% return, why are you in business?)

The bad:

Using debt to finance a lifestyle is a bad way to use debt. However, most people simply can’t afford to live without some form of debt. In these cases, the debt should always be attached to an asset of greater value. For instance, a mortgage is almost always attached to real estate valued at more than the mortgage. Financing a vehicle is less clear since if you do 100% financing, you will have an asset valued at less than the loan amount the minute you drive off the lot. As you can see, “correct” use of debt is limited to very few scenarios.

The Ugly:

Student loan debt, credit card debt, personal loans, credit lines, etc. are all really bad forms of debt. The cost of the money is high and there is no asset backing it. If you have any of these forms of debt, it is likely you also have very little savings. This type of debt is to be avoided and eliminated. Nobody with any wealthy carries this type of debt.