Should you ever borrow money?

Maybe you’ve sat through a popular class where a famous personal finance guru convinced you that if you borrow money, you’re an idiot.

He’s not entirely wrong (about debt – he’s certainly wrong about you being an idiot). It’s just not the whole picture. It’s certainly nice to be free of the burden of debt. If you’ve done well and love living on cash only, more power to you. Chances are, you’re likely to do well with retirement, too.

But not all debt is created equal.

It’s actually possible to wisely leverage someone else’s resources in a way that creates an increase in your cash flow. And with more cash flow, you can get caught up or further ahead even faster.

Some of the wealthiest business people I know purposely borrow money from others to invest in income-producing enterprises instead of risking all of their own assets.

Starting a business, buying rental properties, or furthering your education to increase your earning potential would all be examples.

It’s ultimately about taking calculated risks that keep you out of excessive debt. My own debt rules would be:

Rule #1: Borrow when buying with today’s dollar is better than buying with tomorrow’s dollar.

If you’re saving to buy a house for $350,000 and you wait three years (in our current market where I live in Northwest Arkansas), you’re going to need $500,000 instead of $350,000 because of a rapid increase in the cost of housing.

Saving up the cash suddenly seems pretty formidable. But if you had borrowed for the purchase initially, you would be paying on a $350,000 mortgage and you’d have an extra $150,000 in equity resulting from the value increase over those three years.

Side Note: I love helping people figure out how to buy and sell property and invest in real estate. Contact me directly if you have questions!

Rule #2: Borrow only when you can keep your debt-to-income ratio manageable.

If 40% of your income each month is spent repaying debts, you’re already in the stressed zone. A lot of bank underwriters will recommend you keep it under 30 or 35%. I recommend keeping it under 25% if at all possible.

Why? Because stuff happens. If you lose some income, debt payments pile up very quickly and bring phone calls from upset creditors, which sends your stress level through the roof.

Rule #3: Borrow to invest, not to consume.

Using credit cards to finance the purchase of personal luxuries that lose their value as soon as you buy them isn’t wise because you’re left with the liability and none of the equity.

When you borrow money to eat out, you lose the value of the meal when you leave the restaurant, but you carry the liability out the door with you. The same is true for vacations and other entertainment.

Borrowing for cars can be similar, which is why you should only borrow for a car purchase if 1.) you can be right-side up immediately (owing less than the car is worth), and 2.) you can pay the debt at twice the rate the lender expects (basically doubling your payments to chop the debt down quickly and save interest expense).

Rule #4: Borrow only what you could reasonably pay if your income dropped for six months.

When you’ve invested in real assets that produce recurring monthly cash flow, this is less of a concern because not everything rides on your employer continuing to succeed. But most of us don’t have those recurring cash flow streams (yet).

Rule #5: Borrow only if you’re going to know and track your numbers obsessively every single month.

If you ignore your finances for a month, it will turn into two, at which point it’s already become an intimidating and scary monster you’re unwilling to face. And that’s how we wind up so far behind.

Decide today you’re going to have the courage to face the reality of your numbers consistently.


If you’re already stressed out by your level of consumer debt…

If you’ve demonstrated poor tracking skills in the past…

If you don’t have a six month track record of paying off all of your credit cards every single month…

Then stop.

Don’t borrow right now. Take some time to pay things down and use a debit card like the Acorns card and savings app.

When you’re ready to make an investment that requires debt, wade in slowly. It’s vital that you’ve established the discipline of never paying revolving interest (credit cards) and always tracking your finances.

So the formula is…

1. Have enough money in the bank that you won’t get behind.
2. Borrow money when it can earn you more than it costs you.
3. Pay it back aggressively.

And of course, save and give along the way. You’ll need both wisdom and generosity to live a meaningful life no matter what your net worth is on paper, so exercise your wisdom and generosity muscles by saving and giving rather than just consuming until you die.

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