Being debt-free is a financial badge of honor. With American household debt at $18 trillion at the end of 2024, it's easy to understand why.
People seek the peace of mind that comes from knowing no one has a claim on their paychecks (except the IRS).
What if living a debt-free life isn't the best option?
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A neutral tool
Debt isn't inherently bad or good; it's a financial tool that can be used to further your goals if you understand the processes behind it. When used correctly, it can increase your net worth, enhance your earning power or generate long-term returns.
The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.
The trick isn't to avoid debt like the plague, but to know when and which type is worth taking on.
We'll discuss several scenarios in which taking on debt is a smart, strategic move. Learn which types of debt make the most sense in each case, what to watch for and how to evaluate these decisions.
1. Take on a mortgage in a favorable market
In the first quarter of 2025, the American homeownership rate was 65.1%, a decrease from 65.7% at the end of 2024. This means that fewer people, especially first-time buyers and younger adults, can afford to own the house in which they live.
Higher mortgage rates and a limited housing supply are among the main contributing factors, but the fear of incurring debt also exacerbates this situation.
For most people, homeownership is the biggest financial decision they'll ever make. It's also one of the most misunderstood when it comes to debt.
A mortgage puts you into six figures of debt, but it's also one of the few loans that can make you wealthier over time.
Unlike rent, which goes straight into someone else's pocket, mortgage payments gradually build equity, which grows as your home appreciates in value.
"Over the years, I've helped thousands of people move. Based on my observations, homeowners tend to be more focused on the future than renters," says Adrian Iorga, founder and president at Stairhopper Movers. "They're investing in their property and their community, not just paying to live. That mindset shift from renting to owning makes a big difference in long-term wealth and lifestyle."
When it makes sense
Factors that make taking a mortgage a good investment include:
- Interest rates are relatively low or stable
- You plan to stay in the home for at least five to seven years
- Your monthly mortgage payment is manageable within your income
- You understand all costs involved, in the short and long term
- You're buying in a high-demand or appreciating market
If you're not yet sure if buying a home is the right step, maybe this fact will help you decide: The wealth of a typical homeowner in America is almost 40 times larger than that of the typical renter, according to the Aspen Institute.
2. Invest in education or high return on investment (ROI) skills
College graduates are more likely to be employed than high school graduates and will earn, on average, $1.2 million more over their lifetime.
Most people are aware of this through their own experiences in the workforce, which is why the global student loan sector is currently undergoing a growth phase.
As a parent, you want to ensure your child has all the opportunities they need to be successful in life. Still, the increase in the costs of higher education drives more students towards taking out loans, which ties down a young adult before they start a proper career.
"I've seen firsthand, through my clients, how borrowing large amounts for low-return education can create decades of financial strain," says Conrad Wang, managing director at EnableU. "When debt doesn't lead to real opportunity, it becomes a trap. This is why it's crucial to weigh the long-term value of what you're financing."
This doesn't mean you shouldn't invest in your education or skills. When used strategically, education debt is a high-return investment that continues to support your growth for years to come.
When it makes sense
If you're pursuing a degree or certification in a high-demand, high-income field — technology, health care, finance or the skilled trades — debt can be a smart move. Fields with strong job placement rates and a reasonable cost-to-earnings ratio are especially worth the investment.
Bonus tip: Take advantage of grants, scholarships or employer tuition reimbursement first. If you do take out a loan, devise a clear repayment plan based on your expected income after graduation.
3. Use business debt to further your goals
"Debt and entrepreneurship both carry risk, but when paired strategically, they can unlock serious growth," says Shan Abbasi, director of business development at PayCompass. "As an entrepreneur, you can use borrowed capital to scale smarter, improve operations, and boost revenue. It's all in the intention behind the debt."
Business loans should be used to scale operations, hire talent, invest in equipment or expand into new markets. Borrowing to cover ongoing losses or unclear expenses often leads to deeper debt, not growth. If you don't know how the loan pays for itself, you're better off.
When it makes sense
The best time to think about taking a business loan, such as a Small Business Administration (SBA) loan or a line of credit, is when you already have a profitable or proven business model. Even then, you shouldn't jump on the first funding opportunity that comes your way.
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Explore all options and choose the most cost-effective financing solutions. Put together a clear and realistic plan for how the borrowed funds will generate more income and if you'll be able to repay the loan even if growth is slower than expected.
4. Bet on strategic investments instead of lifestyle upgrades
It's tempting to use debt for a flashy car, a kitchen remodel or that two-week dream vacation to the Maldives. While some purchases might feel like upgrades, they rarely pay you back.
As Michael Melen, co-founder at SmartSites, puts it, "When I started SmartSites, I invested most of my personal finances into building the business. It meant sacrificing short-term comforts like luxury vacations or splurges, but I had a clear vision of where we were headed. That focus paid off. The smartest investment is in your future."
If you're not interested in entrepreneurship, you can focus on things such as energy-efficient home improvements, rental property upgrades that increase cash flow or certifications that boost your earning power.
When it makes sense
Regardless of what type of project you're funding, make sure you can handle the monthly payment without jeopardizing your emergency fund or retirement contributions.
Shop around for the most favorable loan terms, and choose only projects that either increase your income or reduce long-term expenses.
The bottom line
In the real world, strategic debt is a powerful tool for building wealth. Whether it's investing in property, education, business, or smart upgrades, the key is borrowing with intention and a clear ROI.
There is no such thing as "bad" debt; rather, it is debt taken without a plan and for the wrong reasons. Make it work for you, not against you.
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