Money For the Rest of Us – Episode 547

Debt Is For Managing Wealth Not Creating It
Host: J. David Stein
Date: December 17, 2025

Overview

In this episode, J. David Stein explores the often-misunderstood role of debt in personal finance and investing. Spurred by a member’s question about a new startup, Basic Capital, Stein dissects the proposition that leverage can or should be used as a primary path to wealth creation for individual investors. The focal argument is captured in the episode's title: "Debt is for Managing Wealth, Not Creating It." Stein brings deep context, historical perspective, and clear math to bear on the topic, ultimately cautioning against leveraged investment products unless conditions are extraordinarily favorable.

Key Discussion Points & Insights

1. Reflections on 2025 & Podcast Direction

• Stein summarizes the year’s output: 31 solo episodes, four interviews, seven FEG Insight Bridge episodes, and various deep-dives into asset classes, AI, and financial policy ([00:00–03:10]).
• Looking ahead to 2026: fewer ad-supported episodes and a shift toward "deeper, more remarkable work."
  • “It gives me more time to think about the topics … and just make a better audio podcast.” ([03:07])

2. Introduction to Debt & Leverage in Finance

• The episode’s inspiration: a member question about Basic Capital, a startup granting access to leveraged retirement accounts ([04:08]).
• Basic Capital allows individuals to allocate a portion of retirement savings to a leveraged product designed to amplify investment returns.
  • “If you want to buy a house, you take a mortgage. If you want to buy a car, you take a car loan... Why isn’t there a mechanism for me to finance investments in the market?” — Abdul Al Assad, Basic Capital ([04:49])

3. The U.S. Government’s Role in Mortgages

• Explanation of Fannie Mae and Freddie Mac—how government guarantees secure 90%+ of US residential mortgages ([05:16–07:01]).
• Comparison to Denmark: Higher mortgage rates but higher homeownership, challenging the notion that government-backed leverage is essential for ownership ([07:15]).

4. Leverage Does Not Create Wealth—It Manages It

• “There’s this idea out there, kind of a myth, that the wealthy built their wealth because they used leverage… and that’s just not true.” ([08:33])
  • Most wealth is created by investing in businesses and productive assets without leverage.
  • Banks rarely lend to startups due to high risk. Borrowing becomes feasible only after wealth/cash flow is established.
• The wealthy typically borrow against existing assets to manage liquidity and taxes, not to create wealth ([09:27]).
  • Reference to life insurance “infinite banking” (see episode 353).

5. Leverage in Real Estate and Other Assets

• Leveraged real estate (apartments, rental units) is viable due to cash flow and collateralization, but typically requires substantial equity (unlike the US home mortgage market, which can be 97% debt due to guarantees) ([10:30–11:45]).

6. Critical Analysis of Basic Capital’s Model

• How it works: For each $10,000 invested, Basic Capital provides $40,000 as preferred equity, which requires a 6.25% annual payout plus fees ([14:22–16:17]).
  • “It’s expensive at 6.25%... That compounded cost... gives very little wiggle room for this to work out. I wouldn’t do it because the downside’s too great.” ([25:17])
• Fee structure: 0.5% management fee, 5% “carry” (share of gains), all apply to both your and their capital.
• No margin calls but perpetual costs and preferred dividend regardless of returns.
• Break-even analysis:
  • Must earn 7.1% annualized just to match unleveraged investment returns.
  • Earning less than 5.5% annualized = negative returns after fees ([18:00–19:30]).
• Longevity issue: The longer you stay invested, the lower your realized annual return due to compounding fees and preferred return ([20:20]).

Notable Quote

“Debt increases the optionality for people who already have a margin of safety... But by and large, debt is not a wealth creation vehicle. It’s to manage wealth.” ([14:22])

7. Impact of Market Volatility

• If portfolio returns are volatile—even with strong average returns—results worsen dramatically with leverage.
  • Example: Single -25% loss in year 7 tanks long-run returns under the leveraged structure ([22:24]).
• The system is extremely sensitive to timing risks ("sequence of returns risk") and requires sustained, consistent outperformance to benefit.

8. Cost of Capital is Critical

• Only worth leveraging if you can borrow at very low rates (example: 3% mortgage vs. 6.25% for preferred equity).
  • Hedge funds make leverage work because they borrow at exceptionally low rates ([25:03]).
  • Rate must be low to provide “a greater buffer”; that’s not the case with products like Basic Capital.
  • “If the leverage cost is that high… just invest straight up in the asset markets without using leverage.” ([25:36])

Notable Quotes & Memorable Moments

• “There’s this idea out there, kind of a myth, that the wealthy built their wealth because they used leverage… and that’s just not true.” (J. David Stein, [08:33])
• “Debt is for managing wealth, not creating it. There are no shortcuts there.” (J. David Stein, [26:00])
• “Don’t leverage up portfolios unless the cost of financing is very low or you get a government guarantee on it and it’s going to be low. Otherwise, just don’t do it.” (J. David Stein, [25:03])

Timestamps for Important Segments

• Year in Review & Podcast Direction: [00:00–03:10]
• Debt, Leverage & Basic Capital Introduction: [04:08–06:00]
• Fannie Mae, Freddie Mac & International Comparison: [05:16–07:15]
• Wealth and Debt: Myths and Facts: [08:33–11:00]
• Analysis of Basic Capital’s Structure: [14:22–20:20]
• Spreadsheet & Break-even Calculations: [18:00–21:30]
• Effect of Volatility: [22:24–23:55]
• Cost of Capital lessons: [24:59–26:00]

Conclusion & Takeaways

• Debt should be used for optimizing and smoothing cash flow once wealth is established, not as a shortcut to build wealth, especially with high borrowing costs.
• Products like Basic Capital are risky: high costs, the need for market-beating returns, and a severe “downside asymmetry.”
• Stein’s final advice is clear: avoid leverage with high-cost structures unless you have low, stable financing or government guarantees.
  • “Debt is for managing wealth, not creating it. There are no shortcuts there… You can get wiped out… if the markets work against you.” ([26:00])

For more context, spreadsheets and deeper guides, Stein encourages listeners to join the Money For the Rest of Us Insider’s Guide.