When Does it Make Sense to Take on Debt?

Taking on Debt

Guest Article by Neal Frankle CFP® from CreditPilgrim.com.

Do you try to avoid debt like the plague?   Good. Most people think that debt should be avoided when possible and in most cases they are right.

At the same time, there are a few notable exceptions; situations when taking on debt are actually very smart.

Mortgage debt (when affordable) is the best example of this as we’ll see in a minute. But did you know that there are other cases when going into debt can be a very smart move?

In order to understand this concept, let’s look at mortgages a bit deeper to understand why this kind of debt works to your advantage. That will help you understand why other kinds of debt can make sense too.

Why Mortgage Debt Makes Sense

Assuming you can afford to make the payments, having a mortgage can be a genius move.

Most people couldn’t afford to buy a home outright and having a mortgage is the only way most of us can even dream of owning our own place.

From a financial standpoint, the mortgage provides tax benefits, forced savings (you have to make those payments or you will lose your home) and thus a slow equity build into an asset that over time may appreciate in value.

I’m not arguing that buying vs renting is better. I’m saying that mortgage debt can be good because it allows you to own an asset.   And that is the central theme – debt is only good if it helps you build an asset.

If it only funds consumption, it is bad debt.

Let’s apply that idea and see other examples where having debt can be shrewd.

Obtain Special Training

Let’s say you earn $50,000 a year and if you take a certain course or training, you’d be able to bump your earnings up by $16,500 a year.   Let’s say that training costs $15,000 for example and that the only way for you to finance that education would be debt.

In this case, you get a return on your money in 1 year (including interest costs explained below).

That’s a 100% return friend and very hard to beat.   Even if it costs you (heaven forbid) 10% to borrow the $15,000, you come out way ahead.

Let’s look at the numbers a little closer.

Let’s say you pay $1500 in interest costs over one year to borrow the $15,000 – so the entire cost of the education is $15,000 plus $1500 or $16,500. But you earn that $16,500 back in one year.

After that first year, the extra $15,000 you earn as a result of the higher level of training is pure gravy.

You invested $16,500 in yourself. And because you knew you would get that pay increase, it was a no-brainer to take on the debt. Let’s continue.

Finish a Degree

Let’s say you are attending college and only one year away from finishing your degree but the only way to finish school is to take on $20,000 in loans.

If the degree is going to help advance your career and the least cost way of obtaining that degree is to borrow the money, that’s what you should do.

This is not to say that it always makes sense to finance a college degree with loans. I am firmly against this idea in most cases.

If you are just starting college and have limited resources, consider community college first and then transfer. Next, look into state schools and other lower-cost alternatives.

You have to be very deliberate when it comes to higher education because in most cases, people who go to lower costs schools make the same money (or more) as people who attend expensive colleges 5 years after graduation.

This example illustrates a very specific example; when the only way to finish a degree that will help advance a solid career is to go into debt.

This example, like the one above, is pure math.   If you can invest $20,000 to finish your degree in order to make (for example) $20,000 more per year than if you don’t finish the degree, then taking on debt is smart.

If you will make the same money if you do or do not finish the degree, it’s better to spend that $20,000 on some specific training that will help you earn more.

Entry into Career

Sometimes it can be brilliant to take a huge cut in pay even if it means going into debt for awhile.

I have a client who was an MBA from Harvard and had a great job at one of the largest accounting firms in the United States. On top of that, he had a wonderful salary and sweet perks. The only problem was that he hated what he was doing.

What he desperately wanted to do was to be a high-end commercial photographer. He had a great eye for the camera, connections and a true passion.

Being a smart fellow, he investigated the situation fully and discovered that he could start out on the ground floor working for a friend and work his way up. When I say ground floor, I mean it.

His first job was sweeping the set and as you can imagine, he took a huge pay cut to go this direction.

Taking the pay cut meant he needed to borrow money for a couple of years – which he did.   But the gamble paid off nicely.

After 3 years, my client had his own studio and was busy photographing for some of the biggest companies in the United States.

He paid off his debt quickly and was able to build a substantial investment portfolio shortly thereafter.

This is another example of investing in your career.

In this case, my client was taking a chance of course but did a lot of ground work and was pretty sure of what the costs would be (added debt) and how long it would take for the investment in himself would pay off.

Physical Health

If you need to borrow money to get healthy – you do it.   That you know of course. But I want to take this a bit further.

If you really can’t stand what you do and it’s taking a physical toll on your health, it may be time to seriously consider quitting even if it means you might go into debt for awhile.

Obviously, it’s much better to line up something else – anything else – if possible before you quit. But when it comes to your physical well-being, that’s more important than money.


I’m not a big fan of having an expensive ride. But having a car is a must for many people.

Again, this comes down to simple math.   If you can’t work without having a car, you buy a car.

My advice is to spend as little as you can to get a dependable auto but still get something even if it means you have to get a loan if you can’t work without one.

It might even make sense to buy a car if it saves you a lot of time – even if it doesn’t allow you to work immediately.

It just depends on how you plan on using that time.   For example, let’s say you can free up 2 hours a day by having a car vs. using public transportation.

If you plan on using those 2 hours to study at home in order to get a job or to build up a side business, buy the car.

Just make sure you actually use the time in a way that has a financial return on your car investment

Bottom line

As I said towards the beginning of the post, taking on a debt to invest can be a good idea.   Just make this decision based on real numbers and probable outcomes.

My suggestion: if you are thinking about going into debt in order to earn more down the road, run your ideas by 3 other people who have what you want to have (some day) financially.

Don’t ask your friends because they might not have the experience other more seasoned people have.

When you talk to these people, be open minded and don’t try to convince them. Listen more than you speak.

You will walk away with either a greater conviction that you are on the right path or you’ll walk away with a better idea that could save you tremendous frustration and money.

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