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Using Debt To Your Advantage


Happy June, all! How are we already midway through 2023? This has been a year of blessing and growth for me and I'm excited to see what the second half holds.


I've focused on debt as my main topic for quarter 2 of this year. In April, we talked about what debt is. In May, we discussed ways to pay down our debt. Along the way, I've shared my personal experiences and beliefs about debt, hopefully making this topic more accessible to you.


This month, I've been exploring the question: can debt be a wealth-building tool? I host a session for young girls introducing them to the concept of money. The lesson I want them to walk away with is that money is a tool, nothing more and nothing less. As I've been sharing my debt journey with you all, I realized I had not seen debt as a tool; instead, I'd been avoiding it like the plague. 2023 has led to an internal shift for me around debt and how I can use it wisely, rather than avoid it, to achieve my long-term wealth goals.


In this post, we'll talk about using debt as a tool to help you get an education, start or grow your business, and purchase a home (long considered a marker of wealth).


Before we dive into the nitty gritty, I have to share a disclaimer about using debt to your advantage. This post is for you if you:

  • Can cover all of your bills without using debt; i.e. you are not using debt to survive

  • Regularly budget and/or have a tool you use to understand your cash flow

  • Have a low debt-to-income ratio

If this is not true for you, please visit my previous two blog posts and come back here when you are in a better financial position.


I also want to be clear that debt is only an advantage when used to "purchase assets that will increase in value over time" (Money U.S. News), i.e. your career, business ideas, or property. Debt is not advantageous when used to purchase things that will "decline in value over time or that you can quickly consume" (Money U.S. News).


With that introduction and disclaimer, let's dive in!


Student Loans

I'm sure we are all familiar with student loans, but just to level set, here is a definition: "an agreement by which a student at a college or university borrows money from a bank to pay for their education and then pays the money back after they finish studying and start working" (Cambridge Dictionary). There is a lot to say about student loans, including the astronomical cost of education in this country and how predatory student lending can be. In this post though, we are going to focus on what you can control.


Before student loans became the debt trap that they are currently, they supported many people in gaining education and achieving career paths that wouldn't have been open to them otherwise. This support can cover all or part of the tuition for a student, provide them with living expenses while attending college, pay for books and school supplies, and give students healthcare while in school. The ability to list degrees on your resume often results in higher-paying jobs or even just doors open to you that wouldn't be open to others without degrees. The benefits of student loans are clear.


However, I've alluded to what student loans have become. So while you can still consider student loans as an avenue to your education and career pathways, there are several other paths to consider when trying to keep costs down while still benefiting from education.

  • Waiting to go to college until you know what you're passionate about pursuing

  • Looking into certifications rather than degrees

  • Starting at a lower-cost community college before attending a four-year university

  • Exploring scholarship options (often look for things that set you apart: race, gender, abilities, etc.)

  • Reducing the amount of loan you accept: often lenders offer you more than necessary; only borrow what you need.

Business Loans

Another way to use debt advantageously is to apply for a business loan. A business loan is "a product offered to business owners running a company who require external funds for operations. The investment cover expenses such as employee salaries, rent, buying equipment, or expanding the business in other cities" (IIFL Finance). I've heard of business loans, but they were a relatively foreign concept to me. I enjoyed researching information about them.


Those who wish to start or grow a business can apply for a business loan so they don't have to use their cash upfront. Many banks offer commercial loans when the applicant has a well-development business strategy they are ready to implement. This influx of cash can be used in many ways (BayPoint Wealth):

  • Help with upfront costs for starting a business, like equipment/inventory, software, premises, registration, etc.

  • Pay initial employees a higher wage, helping you to attract top-quality candidates

  • Gain tax benefits by deducting business expenses

  • Use the money to ensure a profit (marketing and advertising, outsourcing work so you have time for strategic thinking and product development)

There are different types of business loans you can get. Similarly to student loans, when applying for a business loan, you should only borrow what you need. Exploring the various types of business loans offered is a smart move. I would also explore who you borrow from. There are government, bank, and private investor sources for loans to kickstart your business.


Mortgages

Lastly, let's look at mortgages. These are defined as: "an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed" (Consumer Finance).


As mentioned above, homeownership has long been a marker for success. Owning your own home can offer many benefits, the first of which is that it's yours to do with what you want! It can also support generational wealth. Passing down a home can put your descendants ahead of the game. Also, as your home equity (the percentage of the house you own vs. what you still owe to the bank) increases, so does your ability to use those funds to support other asset-building ventures, like purchasing a rental property. Rental properties can serve as a passive source of income, increasing your wealth.


Purchasing a home (especially for the first time) is a big endeavor. While homeownership can be a benefit, it can also be a burden if you take on too much too fast. Ensuring you have a solid nest egg (to pay for the down payment, closing costs, initial repairs, lawyer fees, and emergency fund), an agent you trust, and a loan product you understand is key to homeownership being advantageous to you.


In this post, we've covered three ways that debt can support your wealth-building goals. Remember that all of these ways help you invest in assets that accrue value over time: your knowledge and marketability as an employee; your business ideas; and your home. Debt is not an advantage if purchasing things that decrease in value (like a car, clothing, or a trip).


However, just because there are advantageous ways to use debt, does not mean you have to use them. Weigh your use of debt against your values/financial goals. Do you need a degree to pursue the career you want? Do you already have enough capital to start or grow your business? Does owning a home align with your values and long-term goals? Anytime we make a financial decision, we need to test it against our values. That way, we can ensure we are making the right decisions for our hearts, minds, and wallets. As with anything I share, take this as an opportunity to learn more about ways to use debt advantageously so you can make decisions that allow you to live a values-led financial life.

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