Ray Dalio's key debt advice: The good, the bad, and the avoidable

Updated: 19 Sep 2023, 12:03 PM IST

  • Billionaire investor Ray Dalio advises caution with debt, emphasising the distinction between good and bad borrowing. Dalio highlights the importance of considering whether the debt will aid in future savings or earnings.

Given his impressive net worth and the phenomenal success of Bridgewater Associates, Dalio's opinions on financial matters are undeniably influential.

Billionaire investor Ray Dalio, recognised globally as the genius behind Bridgewater Associates, the world's largest hedge fund, extended a word of caution to young adults and their relationship with debt.

Recognising the Debt Crisis Among Millennials and Gen Z

Statistics unveil a worrying trend. Millennials, those aged between 25 and 34, carry an average debt of $42,000 each. Their successors, Gen Z, though only aged between 16 and 20, are already burdened with an average debt of $4,343, as per a CNBC report published a few years ago. With surging interest rates, this debt is becoming even more daunting to manage.

Dalio's Debt Dichotomy: The Good vs. The Bad

Dalio emphasises the importance of discernment when considering loans. "Be very careful about debt," he asserts, highlighting the need for analytical thought before signing the dotted line. His primary criterion? "Will the debt help you save or earn more money in the future?"

Explaining further, Dalio mentions, "Debt that produces more cash flow than it costs is good." He cites educational loans that lead to significant salary boosts as exemplary "good debt." Another form of commendable borrowing is one that enforces savings over time. Dalio uses the example of home mortgages, which act as a forced savings mechanism.

On the other side of the spectrum, Dalio warned against debts incurred purely for consumption, which he categorises as "bad debt." He starkly illustrates this with the example of the perilous credit card debt, especially when used for lifestyle expenses without timely settlements.

Dalio's Personal Stance on Debt

Reflecting on his personal journey, Dalio reveals, "I'm personally very debt and risk averse — probably too much so." He attributes this conservative approach partly to his father's experiences during the Great Depression. Emphasising the solace of financial security, he recalls the lessons from his father about the liberating feeling of having no obligations and a secure safety net.

Given his impressive net worth and the phenomenal success of Bridgewater Associates, Dalio's opinions on financial matters are undeniably influential. He boasts of never resorting to significant personal borrowing and underscores the benefits, stating, "Besides having peace of mind, it gave me the power of knowing that I could never be knocked out of the game."

In these turbulent financial times, Dalio's wisdom resonates more than ever, underlining the importance of understanding debt and managing it wisely.

(Several parts of the text in this article, including the title, were generated with the help of an AI tool.)

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First Published: 19 Sep 2023, 12:03 PM IST