How to use debt to build wealth: Smart strategies for families

Sometimes, borrowing gets a bad rap. While it's not wise to run up your credit card tab, not all borrowing is bad. Borrowing money can be a powerful tool once you learn how to use debt to build wealth. Here, you’ll learn the difference between good debt and bad debt, so you can better use debt to build wealth. Plus, you’ll find helpful resources for families hoping to learn smart borrowing habits together.

Good debt vs. bad debt: What’s the difference?

Debt means you borrow money with the promise to pay back what you owe, possibly including interest. Interest is the amount your bank, credit card company, or mortgage lender charges you to borrow the money. While many types of debt exist, deciding the purpose of your debt will tell you if it’s good or bad. 

Good debt

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Good debt aims to increase your wealth over time. When you borrow money to invest in something likely to increase in value, this kind of borrowing will earn you more over your lifetime. For instance, a mortgage loan is typically considered good debt. American home values have risen 230% in the last 30 years, showing massive gains in equity that can lead to substantial returns.

Bad debt

Bad debt creates financial strain without advancing your net worth. It can take many forms, such as spending frivolously beyond your means and not paying down credit card interest, which in turn causes your debt to metastasize. If you're not careful, it can mean squandering your money on interest payments instead of investing for the future. One good way to erase bad debt is to use the Snowball Method to pay off your bad debt, starting with the smallest first. 

Using debt strategically to support wealth-building goals

Once you’ve established your wealth-building strategies, you can put good debt to work for you. Building wealth can mean doubling your money, but first, it requires a little bit of planning. When you’re considering taking on debt, ask yourself a couple of questions:

• How will this loan affect my finances today? If the loan you’re considering will make your weekly budget problematic, it’s worth reconsidering your borrowing or revamping your budget. 

• Will what I’m purchasing be worth more or less money in 15 years? If you’re borrowing to earn a degree or build a home, it’s likely a good investment in your future. Unfortunately, that iced coffee is gone after 15 minutes. 

Student loans

Student loans can be a form of good debt if used wisely, allowing you to increase your earning potential over your lifetime. The average cost of books, tuition, and room and board for on-campus students averaged almost $109,000 in 2024. College is undoubtedly expensive, but the early cost increases your ability to earn throughout your life. In fact, the average male college graduate will earn approximately $900,000 more than their peers who have a high school diploma. Graduate degrees can earn you even more, with the average person with a graduate degree earning about $1.5 million more than those with only a high school degree. 

Homeownership

American home values have steadily increased over time. If you own a home, you'll build equity over the years, which is the difference between the home's value and what you owe. This will come in part from paying down your debt and in part from your home's value increasing over time. While current home prices are at all-time highs in many parts of the country, it can still be a wise decision to invest in property when looked at through a long-term lens. The National Association of Homebuilders found that homeowners have an average reported net worth of $396,000, while renters reported an average of $10,400. 

Teaching kids smart borrowing habits

It’s never too early to start teaching your kids good financial habits. Young kids learn through play, so start teaching them about borrowing when your oldest suddenly regains interest in a toy his little sister just picked up. “Remember, when we take something, we have to give something in return.”

As your kids get older, teach them how borrowing works using practical learning experiences. If your 10-year-old wants a toy at Target, teach him about “buy-now-pay-later” thinking. See how many chores he’s willing to do to earn the item. Hold him accountable, and when he’s finished all his work, ask him if the impulse buy was worth the effort.

Greenlight, the #1 family finance and safety app, offers an incredible money management learning experience. You can monetize your child’s chores to help them more clearly see how much debt they still have from that Target trip. 

Pitfalls to avoid when using debt to build wealth

Keep in mind that debt, like any other tool, carries certain risks. If you incur debt beyond your ability to pay, you may need to seek debt consolidation or another form of debt relief. Avoid the following mistakes to help you use debt to build wealth for a solid financial future:

• Don’t borrow too much: This first mistake seems obvious, but many people have found themselves in too much debt. You can use a debt-to-income ratio to see how your finances measure up. This calculation tells you how much of every dollar you earn goes to pay for debts. If you own a home, you want about 36% or less of your income to go toward debt. If you rent, you want about 15% to 20% or less. If you borrow more than that, you may feel the strain on your cash flow. 

• Don’t ignore interest rates: Remember, interest rates are the “thank you” fee you pay the lender for the privilege of borrowing money. A single percentage point change can mean $100,000 difference over the life of a 30-year loan. That’s why it’s essential to check rates. The federal government sets mortgage rates, so you won’t see a ton of variance from one lender to another. On the other hand, interest rates on auto loans, personal loans, or business loans can vary from one bank to the next, so it’s wise to shop around. 

• Don’t use everyday debt: Remember, debt should build wealth, not increase daily expenses. If you only pay the minimum credit card payment, that $50 sweater could end up costing a lot more. Only use debt in ways that build wealth, not for daily indulgences. Doing so ensures you're saving money each month by avoiding unnecessary interest payments.  

Empower your family to use debt wisely and build lasting wealth

Debt isn’t necessarily a negative thing. If you plan well, invest wisely, and avoid major mistakes, debt can be a powerful tool to help you build wealth and increase passive income. When you use debt to build wealth, you are using debt wisely and can avoid mistakes such as over-borrowing. For kids, learning to build wealth using debt can be confusing, but it doesn’t have to be. With an integrated app and a debit card for kids that comes with granular parental controls, Greenlight can help you give your kids the best tools for a bright financial future.  

Teach responsible borrowing. Lending can be a teachable moment for the whole family with Greenlight’s award-winning money app. Try Greenlight, one month, risk-free.†