Debt: A Powerful Tool or a Risky Trap?

For many, the word debt sparks thoughts of financial stress—monthly payments, interest piling up, and a constant drain on income. That’s true for bad debt, especially high-interest obligations like credit cards. But debt itself isn’t the enemy. When used strategically, it can be a wealth-building tool.

Robert Kiyosaki, author of Rich Dad Poor Dad, is a strong advocate of this mindset. He claims to hold over a billion dollars in debt—not as a liability, but as a tool to control income-generating assets. The key is understanding the difference between good debt, which works in your favour, and bad debt, which does the opposite. Debt isn’t inherently dangerous, but how you use it makes all the difference.

What distinguishes good debt from bad debt and how does each impact financial health?

Debt isn’t just about borrowing money—it’s about what you do with it. Good debt is an investment. It helps you acquire appreciating assets or increase your earning potential. A mortgage allows you to buy property, a student loan can raise your lifetime income, and business loans help entrepreneurs grow their ventures. These types of debt can ultimately make you wealthier.

Bad debt, on the other hand, funds lifestyle expenses that don’t generate returns. High-interest credit card debt, payday loans, and financing depreciating assets—like a fancy car you can’t afford-end up costing you more than they’re worth. If debt isn’t helping you grow wealth, it’s probably working against you.

The long-term impact is significant. Good debt can build creditworthiness, increase net worth, and create passive income. Bad debt drains resources, reduces financial flexibility, and can lead to a cycle of borrowing just to stay afloat. The trick isn’t avoiding debt—it’s using it wisely.

How can individuals leverage good debt to acquire assets and build wealth?

Debt isn’t just an obligation; it’s a form of financial leverage. Instead of saving for years to buy assets in cash, you can borrow and put your money to work immediately. The most common example? Real estate investing. Instead of paying R1 million upfront for a property, you can use a mortgage, putting down 10% and financing the rest. If the property appreciates, your return is much greater than if you had used only your savings.

Entrepreneurs use debt the same way. A business loan allows them to scale operations, hire staff, or invest in equipment—potentially generating profits that far exceed the cost of borrowing. Even education can be a form of leverage; if a degree significantly increases your earning potential over a lifetime, taking out a student loan can be a smart financial move.

Beyond fuelling growth, business debt can also offer tax advantages. Interest payments on business loans are often tax-deductible, reducing taxable income and effectively lowering the cost of borrowing. This allows businesses to reinvest more capital into expansion while maintaining healthier cash flow.

The key is ensuring that debt works for you, not against you. When borrowing leads to greater income or asset appreciation, it’s a powerful tool. But if it simply increases expenses without a clear return, it becomes a liability.

What are the risks and rewards of using debt in an investment strategy?

Debt can accelerate wealth creation—but it can also accelerate financial ruin. Leverage magnifies both gains and losses. If an investment performs well, borrowed money boosts returns. But if the investment drops in value, you’re still on the hook for repayment.

For example, if you finance a rental property and its value rises, you benefit from appreciation and rental income while only investing a small percentage upfront. But if property values decline or tenants stop paying, you’re stuck with loan repayments regardless.

Interest rates are another risk. Low-interest debt can be manageable, but if rates rise, borrowing costs can spiral. Businesses and individuals who rely on cheap debt can find themselves in trouble when market conditions shift.

The best way to manage debt risk? Never borrow more than you can afford to lose. Have a backup plan, diversify your investments, and ensure that debt works for you—not the other way around. Used correctly, debt is a tool for financial growth. Used recklessly, it can be a financial disaster.

However, there’s another side to debt—being the lender instead of the borrower. Fixed-income investments, like bonds and money market instruments, allow individuals to earn steady returns by effectively owning debt. Instead of paying interest, investors collect it by lending money to governments, corporations, or financial institutions. These investments provide predictable income and lower risk compared to equities, making them a crucial part of a balanced portfolio. Next week, we’ll dive into fixed-income markets—how they work, why they matter, and how investors can use them to generate steady, low-risk returns. Stay tuned!