Why Being Debt-Free Isn’t Always the Goal
By: Robert Duquette
24 September, 2026
Debt is often treated as a financial problem that should be eliminated as quickly as possible. While reducing debt can be an important financial goal, debt should not be evaluated in isolation. The objective of financial planning is not simply to minimize debt, but to maximize the likelihood that a household can meet its financial goals. Sometimes those objectives align, and sometimes they do not. The appropriate strategy depends on factors such as the cost of the debt, availability of liquidity, investment opportunities, cash-flow needs, risk tolerance, and proximity to retirement.
The “Debt Is Bad” Mindset
Within the financial advisory space, people often give and receive advice to become debt-free as quickly as possible. Some view debt as a way to live beyond your means, and taking debt into retirement is sometimes seen as a cardinal sin. There is some truth to these beliefs, especially when we consider high-interest consumer debt such as revolving credit card balances. However, these beliefs ignore the power of borrowing as a financial tool. The consequences of debt depend heavily on its purpose, cost, structure, and how it fits within an individual’s broader financial plan.
What Is “Bad Debt”?
To better understand debt as a financial instrument, we need to first understand what makes debt bad. In general, debt that is being used to acquire short-term, non-value-adding assets would be considered “bad.”¹ High-interest credit cards, payday loans, high-interest loans, and discretionary loans can all be examples of bad debt.² However, it is important to note that these forms of debt are not, in and of themselves, “bad.” These debt instruments, like all others, require repayment. High-interest credit cards become problematic when balances are carried from period to period, causing borrowers to incur interest costs. Making only minimum payments can compound the problem by extending the repayment period and increasing the total amount of interest paid.
What Is “Good Debt”?
Good debt is generally used to finance something that is reasonably expected to provide long-term economic, financial, or strategic value relative to its cost. Mortgages are often viewed as good forms of debt because they provide a multitude of financial benefits. Homes can appreciate in value over time, and as such, the acquisition of a home can provide the opportunity for long-term appreciation while also allowing the homeowner to build equity through principal repayment. As homeowners pay down their mortgages and build equity in their homes by paying down the principal, the interest paid on mortgages may also provide a tax benefit for qualifying borrowers who itemize deductions, subject to applicable IRS requirements and debt limits.³
Student loans are also considered a form of “good debt.” The economic rationale behind student loans is supported by the relationship between educational attainment and earnings. Bureau of Labor Statistics data show that median earnings generally increase as educational attainment rises, although the financial benefit of borrowing for education ultimately depends on the cost of education, amount borrowed, field of study, and resulting earnings potential.⁴
The Opportunity Cost of Debt
Once debt has been acquired, borrowers face another decision: How aggressively should it be repaid? Every additional dollar used to pay down debt is a dollar that cannot simultaneously remain liquid, be invested, contribute to a retirement account, or fund another financial goal. As a result, accelerated debt repayment carries an opportunity cost just like any other use of capital.
The thought alone of being required to make payments, especially those that have high minimum requirements, can cause serious stress. However, paying down debt as quickly as possible may not necessarily be the most beneficial decision.
Consider someone who takes out a mortgage at 6% interest and has enough disposable income to pay more toward their mortgage. However, doing so would mean lower contributions to a retirement or investment account. Accelerating repayment effectively produces a relatively certain benefit through avoided interest. Alternatively, investing those funds may offer a higher expected return, but that return is uncertain.⁵ The appropriate decision therefore depends not only on the difference between the mortgage rate and expected investment return, but also on taxes, risk tolerance, time horizon, and liquidity needs.
If we consider the same scenario, but then incorporate a credit card at 25% interest that is carrying a balance and accruing interest, paying down debt accruing interest at 25% becomes substantially more attractive because an alternative use of those funds would need to generate an exceptionally high return to overcome the cost of carrying the balance.
Liquidity Constraints
There is something to be said about how debt can increase or allow for liquidity in personal finance. If someone had a mortgage with a remaining balance of $250,000 and $250,000 in cash, it would be easy to say that they should utilize their current cash to eliminate their mortgage. However, in doing so, they may dramatically reduce their liquidity and leave themselves without an adequate cash reserve for emergencies or unexpected expenses. Debt elimination should not come at the cost of financial stability. While extra cash balances can be used to increase debt payments, completely eliminating liquid assets in favor of eliminating liabilities poses significant financial risk.
Taking on debt to acquire assets that could have been purchased with cash may also allow an individual to preserve liquidity or deploy that capital elsewhere. For instance, consider someone who has $50,000 in cash and wants to purchase a vehicle for $50,000. Financing the vehicle could preserve liquidity and allow cash to remain invested. However, this strategy only makes financial sense if the effective borrowing cost, investment risk, taxes, liquidity requirements, and ability to comfortably service the loan all support the decision.
Debt Within the Frame of Retirement Planning
Proximity to retirement can change how debt and debt repayment should be evaluated. During retirement, households often have less flexibility to increase income because they rely more heavily on Social Security, pensions, and withdrawals from accumulated savings. This makes the concept of paying down debt before full retirement appealing because it reduces a household's total financial outlay during a time when it can be difficult to increase income levels.
Debt payments can certainly be incorporated into a retirement plan, but doing so increases the amount of income the household must generate during retirement. In turn, this may require greater accumulated savings or higher portfolio withdrawals to support the same standard of living. In a sense, debt can be inexpensive from an interest-rate perspective while still being expensive from a retirement cash-flow perspective.⁶
Replacing “Good vs. Bad” With a Decision Framework
The labels “good debt” and “bad debt” provide a useful starting point, but they should not be treated as permanent classifications. Whether debt is beneficial or detrimental depends on its purpose, cost, structure, and how it interacts with the rest of an individual’s financial position.
What does the debt cost?
What are the interest rates and tax implications?
What will the debt finance?
Will the debt be used to acquire an appreciating asset, education, vacation, etc.?
What is the opportunity cost of repayment?
Would paying more increase or decrease other potential earnings?
How does payment impact cash flow and liquidity?
Would paying down debt put borrowers in a cash-flow bind?
Does debt help or hinder long-term goals?
Would taking on debt move the borrower closer to or further from achieving long-term goals?
These are just a few considerations to make when making decisions about debt. Ultimately, debt itself is neither inherently good nor bad. Its value depends on its cost, purpose, structure, and how it interacts with the rest of an individual's financial plan.