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That question is one that haunts personal financial professionals. Really, it haunts investors as well. In the investing sense, too much debt is obviously a bad thing. A company may go under if it cannot handle its debt load. But in a lot of ways no debt could be just as big of a red flag. Is the company passing up opportunities? Is the company resting on its laurels content to stay where they are presently at while others grow around them?

In the personal financial realm, too much debt is also bad for obvious reasons. But is no debt necessarily the best result? Mighty Bargain Hunter argues that it is. His argument is that all debt is bad, whether it mortgage debt, student loan debt, or credit card debt because if something should happen, you will still have those expenses even if you have no income.

The overly pessimistic conservative money manager in me believes that as well. However, depending on your situation some debt could be advantageous. Student loan debt in particular because not only does it increase your earning potential, but it is deductible for tax purposes. That cuts your interest rate by 25%. My wife and I locked in our student loans at somewhere around 3%. That means our after-tax interest rate is around 2.25%. If I pay off my student loans early, I receive a return of 2.25% on that money (the interest I no longer have to pay). If I invest that (even in a money market account) I will surely earn better than 2.25% on my money. So, in this case I will actually have less net worth in the long run if I pay off my student loan debt rather than investing the money.

The same is true with a monthly mortgage. If you locked in at 5.5%, your “true” interest cost is 4.125%. By not paying off your mortgage and investing in the stock market, your annual return would be closer to 10% over the 30 years of your mortgage (the long term return of the stock market). Again, you may have less net worth in the long run by going for zero debt. Also, studies have shown that homeowners generally increase wealth faster than renters due in the same income brackets. That’s because, generally, the rent the homeowner is paying is going towards an appreciating asset whereas the rent a renter is paying is going towards their landlord’s appreciating asset.

This process of using debt to increase net worth is called leveraging. As long as you can earn more on your money than what you pay in interest, your personal returns will be greater when you leverage than when you do not. This is the basic concept behind the Zero-Interest game that I have previously blogged about. However, there is the ever-present tipping point where too much debt will laden you down and you will be unable to repay your debts.

So, is debt right for you? Only you can truly decide your tolerance, but every debt carries risks. Do the benefits outweigh the risks? One way to mitigate the risk of losing your income due to disability is to purchase long-term disability insurance. Life insurance is a more extreme version of this philosophy guaranteeing income in time of death of an income earner. An emergency fund is a must for everyone, but especially for those with debts relating to basic transportation and housing. Most analysts suggest 3-6 months of income, I would say 6 months at a minimum. Put it in a high-earning money market account from Emigrant Direct or HSBC and you’ll be earning at least a little income while still having the flexibility to draw from it if necessary.