Good Debt vs. Bad Debt – The Cashflow Test
Most people judge a loan by its interest rate. But the true measure of debt is its outcome: does it make you richer or poorer?
Think of debt as a chainsaw. Used correctly, it can build a log cabin; used incorrectly, it can cut off your leg. To know which way yours is swinging, you need the Cashflow Test: Does this debt put money into your pocket or take it out?
The Litmus Test for Any Loan
Before signing any papers, ask yourself: “If I stop working tomorrow, will this debt become a burden, or will the asset support itself?”.
- Good Debt (The Multipliers): Leverages the bank’s money to grow your net worth. Examples include strategic education loans that boost your permanent earning power or business loans for machinery that pays for itself and leaves you a profit.
- Bad Debt (The Drains): Funds consumption and steals from your future to make your present look fancy. Examples include credit card debt for dinners or car loans for depreciating assets that lose value the moment you drive them home.
The Golden Rule: ROI > Interest Rate
Even “good” debt turns dangerous if the math doesn’t work. If your investment or business profit margin is lower than the loan’s interest rate, you aren’t working for yourself—you’re working for the bank.
Watch this video to learn how to apply the Cashflow Test to your own finances and discover why the same loan can be “Good Debt” for one person but “Bad Debt” for another.