There may not be a more polarizing debate in personal finance than the concept of Good Debt vs. Bad Debt.
“Good Debt” generally means loans used to acquire income generating assets, like rental properties or businesses.
“Bad Debt” generally refers to consumer debt, which is personal debt owed because of buying things for personal or household use. For most people, this simply means credit card debt.
Two absolute giants in the field, Robert Kiyosaki (of Rich Dad Poor Dad fame) and Dave Ramsey (maybe the most well known personal finance expert in the world), take opposite viewpoints.
If you’d like to learn more about Kiyosaki, check out his website here. For more on Ramsey, click here.
Before addressing their different opinions, it’s important to highlight that both Kiyosaki and Ramsey agree on a critical point:
All consumer debt is bad.
You’d be hard-pressed to find any personal finance expert who says that credit card debt is OK. I’d be concerned if you found anyone at all, expert or not, who seriously took the position that credit card debt is OK.
We’ve talked about how this type of debt is scary and can drag down your finances. We also explored the three big reasons why people end up with credit card debt. The bottom line is you’ll never be truly financially free if you’re burdened by debt.
A quick side note: There is some difference in opinion as to what else besides credit card debt qualifies as consumer debt. For example, is your primary home mortgage considered consumer debt? What about your student loan debt? I’ll give you my take below.
Now, let’s take a look at how each Kiyosaki and Ramsey differ on Good Debt v. Bad Debt.
Kiyosaki believes in the power of Good Debt.
Kiyosaki argues that Good Debt is a powerful tool to generate consistent cash flow from investments. Kiyosaki defines Good Debt as debt that is used to buy assets like real estate or businesses that generate income.
As long as the debt leads to positive income, it’s considered Good Debt. For example, Good Debt would include taking out a mortgage to buy a cash flowing rental property.
Kiyosaki suggests that Good Debt can be responsibly used to quickly acquire more assets, even if the debt is considered a liability.
To better understand the difference between assets and liabilities, check out our post on net worth.
In Rich Dad Poor Dad, Kiyosaki discusses in detail how investors grow their wealth through the responsible use of Good Debt.
Ramsey believes all debt is Bad Debt.
Ramsey could not disagree more with Kiyosaki.
If it were up to Ramsey, there would be no distinction between “Good Debt” and “Bad Debt.” All debt is bad and carries risks that will weigh on your emotions and drag down your net worth.
Ramsey is adamant that debt should not be used as a tool to build wealth. He contends that a person’s income is the best way to consistently build wealth.
In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.
So, where do I come out on the Good Debt v. Bad Debt debate?
Kiyosaki and Ramsey are personal finance legends. There’s no right or wrong in this debate. I appreciate each of their viewpoints.
Ultimately, what side of the debate am I on?
I’m on Team Kiyosaki.
When you responsibly use Good Debt, you can more quickly create income streams to accelerate your journey towards Parachute Money. However, if you’re struggling with consumer debt, taking on any additional debt, even Good Debt, is a bad idea.
Like other real estate investors, my wife and I have experienced firsthand the power of Good Debt. In seven years, we have acquired four cash flowing rental properties (three in Chicago, one in Colorado) that add extra income to our personal balance sheet each month. Without that income coming in, our financial picture would look completely different.
On top of that, we have benefited from appreciation with each of our properties, further increasing our net worth. Of course, appreciation is largely out of anyone’s control. Market conditions have been very favorable for us.
Some people may condescendingly say that we’re just lucky. As bestselling author and thought leader Mel Robbins would say, “Let them think that!”
Of course we’ve been lucky!
That doesn’t change the fact that we acted on opportunities when others only talked. We lived in small apartments for six years with a growing family. We responded to tenants whether we were on vacation or it was the middle of the night. Above all else, we stayed disciplined, focused on our goals, and paid the bills even when money was tight.
For these and so many other reasons, I believe in the responsible use of Good Debt to acquire cash flowing assets.
Just because we’ve taken on debt doesn’t mean we don’t worry about it.
All that said, Ramsey’s voice still rings in my ears when it comes to debt. Up to this point in our lives, my wife and I are comfortable with the Good Debt we’ve taken on to build our portfolio. Even so, we frequently think about Ramsey’s point of view and the valid debt risks he highlights.
Even with the extra rental income coming in, we still feel the heavy burden of mortgage debt. That’s why our goal for 2025 is to prioritize eliminating as much mortgage debt as possible. While we are comfortable with a certain level of debt, we don’t ever want to be reckless.
If you’re thinking about using debt to acquire assets, don’t ever ignore the heavy emotional toll that debt will have on you. Just as importantly, if you’ve struggled with debt in the past, be careful about going down that road again.
It’s easy to get blinded by the potential cashflow of an investment while ignoring the accompanying debt. Long before you ever sign the loan documents, make sure you’ve done your homework and thought hard about what it’ll take to pay that loan off.
What about primary residence mortgage debt and student loans?
I mentioned that I would share my perspective on whether debt to buy a primary residence or student loan debt is Good Debt.
I think both should absolutely be considered Good Debt.
This is one area where Kiyosaki and I don’t agree.
Why I consider a primary home mortgage Good Debt.
Kiyosaki favors using Good Debt to buy assets, meaning investments that put money in your pocket. A primary home does not put money in your pocket, so Kiyosaki would not recommend using debt for this purchase.
He’s not alone in this viewpoint. Many smart people think it’s financially foolish to buy a primary residence instead of renting. For an in-depth analysis on the question of buying vs. renting, check out this video from Khan Academy.
I don’t agree with this viewpoint. For most of us, our primary residence is the best way to build generational wealth for our families. This is not my personal strategy for building wealth. That said, I understand that this strategy is how most of us do build wealth.
Besides just wealth building, I appreciate more than ever how owning a home can be emotionally beneficial. Since we moved to our longterm home, I’ve already experienced the psychological benefits of establishing roots and feeling connected to a community. After bouncing around apartments in Chicago for nearly 20 years, I can tell you that it feels good having a permanent home.
So, I consider a primary home mortgage Good Debt. For similar reasons, unlike Kiyosaki, I recommend including your primary residence in your net worth.
Why I consider student loans Good Debt.
I also disagree with Kiyosaki on whether student loans count as Good Debt.
I don’t want to put words in Kiyosaki’s mouth, but his perspective seems mostly shaped by how he feels about the modern educational system in this country.
How exactly does he feel about our education system?
All things considered, it makes perfect sense that he thinks student debt is Bad Debt.
I don’t agree. I’m grateful for my education through law school. I learned how to think and solve problems. I learned how to challenge myself and do hard things. I think this is true for anyone that goes to school and takes it somewhat seriously.
I’m not discounting Kiyosaki’s point that maybe the system needs fixing. Regardless, I believe that education opens doors, whether that’s through connections made along the way or licenses earned (like the license to practice law).
From my perspective, debt incurred to pay for that experience and training is well worth it.
If that wasn’t enough, the data shows highly educated people earn more money. In fact, men with graduate degrees earn $1.5 million more over a lifetime than those with only high school degrees. That’s another reason why I consider an investment in yourself through student loans Good Debt.
Are you Team Kiyosaki or Team Ramsey?
Maybe you feel there is such a thing as Good Debt. Maybe not. Either perspective is completely valid.
In the end, can we at least all agree that credit card debt is always bad debt?
Are you Team Kiyosaki or Team Ramsey?
Let us know in the comments below.