Debt vs. Leverage – there is a difference

Though I work for a lending institution, I enjoy a periodic dose of Dave Ramsey. For those unaware, Mr. Ramsey has built a small empire helping people get out of debt and manage their money better.

Through radio, books and conferences, he has almost single-handedly turned “debt” into a four-letter word. His “Total Money Makeover” takes readers through a handful of “baby steps” that result in their being able to call his daily radio show to give a “debt-free scream”.

Dave’s logic is sound, his examples clear. For instance, if you invested the equivalent of an average American car payment in a growth stock mutual fund every month for forty years, you would finish with more than five million dollars.

Without a doubt, many Americans find themselves in precarious positions financially. Student loan debt that never turned into a high paying job. Car loans that eat up too much of a family’s budget. Short-term credit card debt that has turned into a long-term problem. A death spiral of pay-day loans.

These scenarios, and a spendthrift U.S. government, have given debt a bad name. But there is another side to the story.

In the finance world, debt and leverage are used interchangeably. Not so in everyday life. “Debt” has a negative connotation, as in something you (or your federal government) get buried in. “Leverage”, meanwhile, conjures a more positive picture of something moving or lifting for the better.

Leverage is not a dirty word. When an entrepreneur hires an employee, she is leveraging that person to expand her capabilities. When a professional takes out a mortgage, he is leveraging his future earning potential to increase his standard of living.

Leverage is a form of teamwork that accomplishes more good collectively than the individual parts could do on their own.

Now, if you’re eating rice and beans on the Dave Ramsey plan, I’m not trying to sell you a steak. Healthy discipline should follow unwise spending. It’s always the right time for self-control.

What I am suggesting is that careful lending has as healthful a place in an economy as currency itself. “Careful”, of course, is the operative word.

It makes no sense for me to loan the recent high school grad $40,000 for a new Mustang when the payment will be more than his apartment rent. It makes no sense for our federal government to be in $1.6 trillion of UNSECURED debt (though “only” $1.1 trillion is held by non-US government entities).

It makes a lot of sense for me to loan the single mom $10,000 to buy an efficient, reliable car with which to get to work on time. And it often makes sense for someone to borrow money at X% if he/she can in turn likely make X+Y% from another investment.

Appropriate leverage presents a borrower with an opportunity to keep a promise. It implies that he is trustworthy and capable of acting responsibly. We humans grow in positive ways when we make and meet commitments. In general, leverage promotes ownership and ownership strengthens a society.

Moreover, one could make a strong argument that the finance industry drove the technological and industrial innovations that have improved quality of life the world over.

In a perfect world, we all would have ample liquidity to bankroll all our purchases. Interest expense would be nonexistent. But in a balanced approach to pursuing life, liberty and happiness, interest expense may be a small price to pay for the progress it provides.

Kevin Thompson writes weekly for The Boerne Star in the Texas hill country. He can be reached at

1 Response to “Debt vs. Leverage – there is a difference”

  1. 1 Susan Allen February 6, 2013 at 08:32

    I like this one too. Don’t stop sending the e-mails to me – I think they are coming through your THB email. Change it to me please.

    Susan (Susie) Allen

    Texas Heritage Bank

    1208 S. Main

    Boerne, Texas 78006


    830-249-3988 (fax)

    Offices in Cross Plains, Boerne and Leon Springs to serve you!!!

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