How the 1% Use Debt to Get Richer (Good Debt vs. Bad Debt)

For most people, debt is something to avoid—an obstacle to financial freedom. But for the wealthy, debt is a tool. A powerful one. While the average person borrows money to buy things that lose value, the 1% borrow money to buy assets that make them richer.

This difference in mindset and strategy is one of the most important distinctions between the wealthy and everyone else. Understanding how the rich use debt, and knowing the difference between good debt and bad debt, can completely change your financial trajectory.

Good Debt vs. Bad Debt: What’s the Difference?

Not all debt is created equal. Here’s how to tell the difference:

❌ Bad Debt: Consumes Wealth

Bad debt is used to buy liabilities—things that depreciate or don’t generate income.

Examples:

• Credit card debt (especially for lifestyle purchases)

• High-interest personal loans

• Car loans (on vehicles that lose value rapidly)

• Payday loans

Why it’s bad: You pay interest on something that doesn’t bring in any money. Over time, this creates a cycle of dependency and shrinking net worth.

✅ Good Debt: Builds Wealth

Good debt is used to buy assets—things that appreciate in value or generate income.

Examples:

• Real estate investment mortgages

• Business loans

• Student loans (when they increase long-term earning potential)

• Margin loans for investing (used carefully and with a strategy)

Why it’s good: When the return on investment (ROI) is higher than the interest you’re paying, you come out ahead. Good debt can accelerate wealth creation when used responsibly.

How the 1% Use Debt Strategically

Here’s how the wealthy flip the script on debt:

1. Leveraging Debt to Buy Assets

The wealthy rarely use their own cash to buy income-generating assets. Instead, they use other people’s money (OPM)—usually through loans or financing.

Example:
A wealthy investor might put 20% down on a rental property, finance the rest, and use rental income to cover the mortgage. Over time, the tenant pays off the debt, while the property appreciates and generates cash flow.

2. Using Low-Interest Debt to Free Up Capital

Even if the wealthy could pay in full, they often don’t. Why? Because money has opportunity cost. If they can borrow at 3% interest and invest elsewhere for an 8% return, they come out ahead.

Example:
Rather than paying cash for a home, a high-net-worth individual might take out a low-interest mortgage and invest the saved money in the stock market, business, or other appreciating assets.

3. Taking Advantage of Tax Deductions

Many types of good debt come with tax benefits.

• Mortgage interest is deductible in many cases.

• Business loans can reduce taxable income.

• Investment loan interest can sometimes be written off.

By reducing taxable income, the wealthy keep more of their money working for them.

4. Borrowing Against Assets—Without Selling

This is a powerful and lesser-known strategy. Wealthy individuals often borrow against their stocks, real estate, or businesses without selling them. This allows them to access cash tax-free while their assets continue to grow.

Example:
A billionaire like Elon Musk doesn’t sell Tesla shares to get cash—he borrows against them. No sale = no capital gains tax.

This strategy is part of the "Buy, Borrow, Die" wealth model:

• Buy appreciating assets.

• Borrow against them to access tax-free cash.

• Die and pass them on with a stepped-up cost basis (avoiding capital gains taxes altogether).

The Trap Most People Fall Into

Many people borrow to look rich—nice cars, fancy clothes, expensive vacations. But the wealthy borrow to get rich—buying cash-flowing assets that increase their net worth.

Here’s the mindset shift:

• Don’t ask, “Can I afford the payments?”

• Ask, “Will this debt make me money or cost me money?”

Smart Debt Rules to Follow

If you want to use debt like the 1%, follow these principles:

1. Use debt only to acquire income-producing assets.

2. Ensure the ROI is higher than the cost of borrowing.

3. Avoid high-interest consumer debt at all costs.

4. Keep a buffer—don’t over-leverage yourself.

5. Understand the risks of adjustable rates, margin calls, or business volatility.

Conclusion: Use Debt, Don’t Let Debt Use You

Debt isn’t the enemy—misused debt is. The rich understand that leverage, when used wisely, multiplies wealth. They use debt to grow, invest, and scale. The average person uses it to consume, impress, and survive.

If you want to level up your finances, start thinking like an investor, not a consumer. Use debt as a tool, not a trap—and it could help you build wealth faster than you ever imagined.