As Warren Buffet said, “the only way smart people go broke is through leverage”.
But how smart people get to the point where they go broke is an interesting study in psychology.
The trick is knowing how to balance off the risks and rewards.
The most important factor to consider is that the amount of the debt needs to be less than the value of the reason why you took it on.
Here is a consumer example: one individual took on a six-figure student loan debt to gain a professional credential in a low-paying niche healthcare field. The field is interesting and helps people. He is contributing to society. But he did not do this simple value calculation and is now saddled with a lifetime of paying down this mountain of debt. That was dumb.
I will repeat this perhaps non-obvious truism: only take on a debt when the (net present) value of the project being financed by the debt is greater than the debt itself.
Another critically important factor to consider is to make sure you are well able to pay the debt back on time. That you can make the debt payments.
Much preferably out of the cash flow generated by the project being financed.
A great book that describes the evolution of debt, risk control, and society’s attitudes towards it all is Against The Gods: The Remarkable Story of Risk by Peter L. Bernstein. It is a good read and is often listed as one of the best investment books by many pundits.
