All across the internet and in common speech, people almost unanimously tell you that debt is a bad thing. That you should avoid it at all costs.

They pay homage to the common advice that living without debt is the only way to go and that ideally you should pay for everything on an all cash basis. Everybody looks at debt and sees this.

It’s true debt used poorly will suck every single loose penny from you and leave you scant broke,worse than broke in fact you’re not just at zero you’re well below zero with little to no hope of breaking even.

What people miss is that all those dollars don’t disappear it’s a simple law of physics that all that money HAS TO go somewhere. The people who collect the debts see an entirely different picture. Here’s what the other side of the black hole looks like from the bank’s perspective.

So when is debt good?

Debt is good when it’s used to give you the power to earn you more money.

If you take out a loan to help pay for an investment and that investment puts more money into your pocket than you would have been able to obtain otherwise, then debt is no longer called “debt”, its called “leverage”. Using the image above leverage is like creating a small black hole and setting up nets in its wake so that the majority of the money falling into it goes into your pocket before it falls in. The trick with leverage is that you have to be VERY careful not to create a bigger black hole than you can manage. You absolutely MUST be able to close the black hole at a moment’s notice in order to leverage assets safely.

Using the other image, debt is good when its other people’s debt and they owe you. The risk is that on the other side, it doesn’t matter how big of a black hole you have, when there is no more money to fall into it, the geyser runs out on your side. Just about all real estate business relies on debt to keep the whole thing running, if you used leverage then you created a stream between one black hole and one geyser,powered by a second black hole. If the geyser runs out you’re royally screwed unless you can afford to pay off and close the other black hole at a moment’s notice.

There is an entire industry out there that most people never hear of. In modern society debt is bought and sold by people called “debt brokers”. These people are the dreaded “collections agencies”. What people don’t realize is that debt collectors buy your debt from the original company you owe, and they pay only a fraction of the amount you owe in order to “acquire your debt”. What people don’t know is that if you have a collections agent hounding you, then it means your debt has already been bought and paid for by their company. This means that they are willing and happy to negotiate so that you can settle the entire debt for less than you theoretically owe.

So when is debt bad?

Debt is bad when you need it. If you need the money then DON’T BORROW IT!
Even the supposed “good debts” are bad,or can become bad really fast.
Renting to own is bad,period. If you do do it,you WILL pay double what you could paying with cash,
and quadruple what you would pay if you bought used furniture.
Student loans are bad,unless you have enough cash in your bank account to pay them off.
Car payments are bad,unless you have enough cash in your bank to buy the car outright.
Mortgages are bad,unless you have enough cash in your bank to pay them off.
Credit card debt is bad unless you have enough cash in your bank to pay it off.

The ONLY time debt is good is when you can afford to pay it off and you’re using it as leverage to earn you more money.
My rule of thumb is to never borrow more (total) than you have in cash, so that the worst case scenario is that you wind up at a perfect zero or a little above.

The only other time you might consider it, is if you can’t afford food. This is one case which you should have change stowed away, but if you need it then you NEED IT.