When Debt Makes Sense And When It Doesn’t
Understanding the difference between financing your lifestyle and investing in your future
Joe always liked working outside. During college, he picked up small gardening jobs in his neighborhood whenever he could. Nothing big. Just helping people with their yards, planting, fixing things here and there.
After graduating, things didn’t go as planned. He struggled to find a job in his field and started taking on more of these small projects just to stay busy.
Over time, he noticed a pattern. He kept turning down better-paying jobs because he didn’t have the right equipment. Larger projects, the kind that would actually move the needle for him, required tools he simply didn’t own.
A small excavator would change that.
He ran the numbers a few times. Based on the jobs he had already seen, it seemed like he could earn significantly more with it.
Still, he hesitated.
Taking on debt felt different when it became real. It wasn’t just a number on paper anymore. He kept hearing what he had been told growing up: Debt is bad.
He opened his banking app more than once, trying to figure out if he could somehow avoid it. But without the equipment, he would likely stay stuck with smaller jobs.
In the end, he went to the bank and took out a loan. Not because it felt comfortable.
But because it felt necessary if he wanted to move forward.
So why do so many people believe that borrowing money is always a bad idea? Because we rarely separate one simple idea:
Debt is a tool. The outcome depends on what you use it for.
Financing your lifestyle vs. investing in your future
Most people encounter debt in different forms. Student loans, credit cards, mortgages. And not all of them are clearly good or bad.
A simple way to think about it is this:
Debt for consumption
Debt for investment
Joe used debt to invest in his future. The excavator allowed him to take on bigger jobs and increase his income.
Now compare that to something much more common: Someone buys a car they can’t really afford, just because they’ve always wanted it. The monthly payments seem manageable. The car is enjoyable.
But over time, it loses value and doesn’t generate any income. That’s the key difference.
One creates future value. The other finances today’s lifestyle.
This doesn’t mean consumption is always wrong. But it often becomes a problem when people use debt for things they can’t truly afford.
Debt has a unique feature. It allows you to bring future benefits into the present. Which leads to a simple but powerful question:
Will this debt help me generate more money than it costs?
In the case of consumption, the answer is usually no. In the case of investments, the answer can be yes. But only if things go as expected.
The hidden costs of “good” debt
When Joe bought the excavator, things picked up quickly. He spent the summer working on front yards, building stone walls, and laying tiles. For the first time, it felt like he was building something that could actually grow.
But he also knew something else. Winter would be slow.
The loan didn’t slow down just because business did. The monthly payments were still there, even when no cash was coming in.
Even a good investment can become a problem if cash flow doesn’t line up. Debt needs to be serviced. And timing matters more than most people think.
And then there’s uncertainty. Maybe demand isn’t as strong as he expected. Maybe a new competitor shows up and undercuts prices.
Suddenly, the numbers don’t look as convincing anymore. Debt amplifies your opportunities. But it also increases your risk if things don’t go as planned.
You make yourself dependent on future outcomes.
When “good debt” turns bad
Some forms of debt are often seen as “good” by default. Take education, for example. In many countries, it’s common to take on debt to study. The idea is simple: you invest in yourself to earn more in the future.
And that can absolutely make sense. But only if the outcome supports it. Not every degree leads to strong income opportunities. Not every plan works out the way you expect.
Just because something is labeled as an investment doesn’t automatically make it a good one. That’s why it’s important to go one step further.
When thinking about taking on debt, don’t just look at your base case. Think about the downside. What happens if things don’t go as planned? Can you still manage the payments?
This isn’t about being pessimistic. It’s about being prepared.
We are not always rational
Debt decisions are rarely purely rational. Many people justify a bigger purchase by saying: “I’ll earn more in a few years anyway.” Maybe. But life is rarely that predictable. Layoffs, health issues, or unexpected changes can happen at any time.
When you combine that mindset with debt, you’re locking future income into today’s decisions.
There’s also lifestyle inflation. As income increases, spending tends to follow. Add debt to the mix, and flexibility disappears even faster.
And then there are the small things. Credit cards. Buy-now-pay-later offers. Installments for phones, furniture, or travel. Each decision feels manageable on its own. But together, they can quietly add up and limit your future options more than you realize.
A simple decision framework
Before taking on debt, ask yourself:
Does this create future income or just current enjoyment?
How certain is the return?
Can I handle the downside if things go wrong?
Is the timing of cash flows safe?
Would I still do this if I had to pay cash?
That last question is surprisingly powerful. Imagining that you have to pay everything upfront often changes how you see the decision.
The bottom line
Debt is neither good nor bad by itself. It amplifies your decisions. Used well, it accelerates progress. Used poorly, it locks you into bad choices.
So before taking on debt, take a step back.
If it helps you create future value and you’ve considered the downside, it can be a powerful tool. If not, it may quietly limit your future instead of expanding it.
Well put. I've seen a shift from "all debt is bad" to "debt is a tool that should be used". The reality is somewhere in between, as you've put it - debt is a tool if the circumstances are correct.
heloo