Today I’m diving into a topic that’s often wrapped in myth and misconception — financial leverage vs. debt. 

The world loves to scare us with lies like all debt is bad and the rich never borrow. In my 15+ years as a CPA and advisor to clients in the world of money, I’ve walked hand-in-hand with hundreds of clients navigating their financial journeys. In that time, I’ve seen it all, and I want to offer a fresh take on the role of debt in wealth-building. 

Let’s start with a simple truth: There’s no absolute statement to describe the nature of debt. It is neither all bad nor all good, and not all debt is created equal. There’s a big difference between the kind of debt that drags you down in metaphorical quicksand and the kind of debt that fuels opportunities to set you up for future success. 

The distinction between the two really depends on how you plan to use the funds, the opportunity that presents itself by taking on the debt (financial leverage), the interest rate, and how you plan to pay down the total debt. 

There are two critical questions you should ask yourself before making the decision to take on debt. 

• What am I using the funds for? Is it for consumption or potential growth? Is it feeding a whim or fueling a dream? 
• Where will my money have the greatest impact and go the farthest?

Throughout my career, I’ve seen debt successfully leveraged in a number of creative ways. Under the right circumstances, debt and financial leverage can be a strategic tool to build personal wealth, provide opportunities for growth, and create meaningful generational wealth.

In this blog, I highlight different types of debt and share a few strategic debt strategies that I’ve seen play out successfully for past clients. 

Types of Debt

1. Consumer Debt

This is what many consider “bad” debt. Consumer debt is taken on to support a lifestyle you can’t afford and is simply the result of living beyond your means. This type of debt is the most costly as it is financing your past consumption versus your future growth, creating a vicious cycle of paying for your past with tomorrow’s money. 

Significant consumer debt will lead to financial stress, relationship strain, and even depression. If you find yourself with significant consumer debt, prioritizing the elimination of this debt is absolutely crucial for your overall well-being.

2. Asset-Supporting Debt

This type of debt is used to purchase something of value, like a home or a car. Though not directly aimed at growth, it’s tied to assets that serve a utility and purpose and that add value to your life.

Keep in mind, it’s easy to overextend yourself, particularly with mortgages. Remember, just because a bank approves you for a big mortgage doesn’t mean you should borrow the maximum amount offered up. Overspending on a mortgage can handcuff your lifestyle and financial freedom. Keeping your mortgage payment below 30% of your take-home pay can help avoid the trap of feeling cash-poor and constrained. 

3. Growth Debt

Now this is my personal favorite — debt taken for the sake of growth. This is the type of debt you take on with a clear goal in mind, whether it’s pursuing higher education, investing in your business, or any form that promises a return or increases your value. This distinction is absolutely key to understand — it’s about leveraging debt to build, not burden, your future.

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4 Ways to Strategically Use Financial Leverage

Understanding the different types of debt and the role each plays in your financial life can transform how you view and manage those outstanding balances. It’s not always a matter of “good” vs. “bad,” but rather understanding the purpose behind the borrowing and its potential impact on your life.

Below are four of my favorite ways to leverage debt

1. Home Equity Lines of Credit (HELOC)

A HELOC is not just a loan. It can be a powerful, flexible line of credit that taps into the equity you’ve built up in your home. There’s a misconception that HELOCs are to be used for home improvements only. That’s not the case. A HELOC offers you liquidity and cash to draw on as necessary, preferably directed towards something that can provide a future return on investment.  

Note 1: If you’ve found yourself in a position with significant debt, the interest rates on HELOCs are often much lower than those you’ll find on credit cards and personal loans, so this can be an attractive option for consolidating higher-interest debt and reducing your interest costs over time.  

Note 2: If you itemize your deductions on your tax return AND you use your HELOC for substantial improvements on your home, you may be able to deduct some, if not all, of the interest paid towards the loan on your tax return.

2. 0% APR Credit Cards

If you own a rental property, have a small business, or are looking to do a small renovation on your house, a 0% APR credit card can be a very effective tool. Affordability should not be at play here. You’re not using this credit card because you can’t afford to pay for the project at hand, but rather because you’d like to benefit from the freedom and flexibility to safeguard your existing cash and pay this debt down with prioritized cash flow month-over-month and at your own pace rather than all at once. 

3. AFR Family Loans

Mixing family and finances can be tricky. But I’ve seen family members successfully support each other in many meaningful ways. Three of the most common strategies I’ve seen include funding a family member’s mortgage, assisting with student loan debt, and/or investing in a business venture. 

Let’s consider a scenario related to student debt. You have student loan debt totaling $100k at 7%, and you have a family member who has significant cash and who would be willing to help you financially, but not as a gift. Your relative could structure a loan agreement with you where you would pay them a stated amount over a specific period of time while using the IRS’s Applicable Federal Rates (AFR) as your “interest rate.”

This rate is a fraction of what you would be charged by a bank or other loan establishment, and your family member would receive a small return on investment. Win-win!

4. Securities-Based Lending

Last but certainly not least, we have securities-based lending. This is very nuanced and requires a substantial amount of investable assets. With securities-based lending, just like your house is collateral for your mortgage, you essentially use your investment assets (stocks/bonds/etc.) as collateral against the securities-based loan. This is typically a more flexible line of credit where there’s no predetermined amount of time you need to pay off the loan. 

You should be mindful that the interest rates for securities-based loans are typically variable, meaning that if rates go up, so does your interest on your loan. Also, if the market goes down, so too does the value of your investments, and thus, your borrowing capability. You should be sure to consult a financial advisor for guidance on this one.  

Use Debt as a Tool (Financial Leverage) to Build Your Ideal Future 

In the world of debt, it’s so important to fully understand your motivations and the potential outcomes of taking on debt. Remember, the goal is not just to manage debt to support your lifestyle — it’s to use debt effectively as a tool for building a brighter, more successful financial future.

Learn more about ways to work with me to manage your current debt, strategically leverage new debt, and fund a future life that brings you both peace and excitement.