Debt vs Leverage (The 7% Rule)
Debt above the market return is a fire to put out; below it, it's leverage to exploit.
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 90%
Dunlap reframes debt around its interest rate rather than shame. The same borrowing that's called 'debt' for poor people gets renamed 'leverage' once you're wealthy: Adele takes a ~4% mortgage on a $30M house she could buy cash because her money earns more elsewhere. The rule: if a debt's rate is below the ~7-8% you can expect in the stock market, prioritize investing; if it's above, like 25% credit card interest, pay it off first. She adds the caveat that personal finance is personal, so if being debt-free brings genuine peace, paying off low-rate debt is valid too, as long as retirement isn't neglected.
Origin
Dunlap positions this explicitly against Dave Ramsey, her self-described 'nemesis,' who preaches eradicating all debt immediately; she argues that stance ignores interest-rate math and traps people who could be building wealth.
Core principles
- 01The interest rate, not shame, decides whether to pay off or invest.
- 02Debt below the ~7-8% market return is leverage worth keeping.
- 03Personal finance is personal: peace of mind can override the math.
- 04Not all debt is bad; some is strategically useful.
How to run it
- 1
Inventory debts and rates
Write down every debt you carry alongside its interest rate.
- 2
Compare to the market return
Benchmark each rate against the roughly 7-8% you can expect long-term in the stock market.
- 3
Attack high-rate debt
Pay off anything above the threshold first, since it costs more than you could reliably earn investing.
Watch out Credit card debt at 25% beats any investment's expected return, so it must go first.
- 4
Leverage the cheap debt
For low-rate debt like a 2% car loan, consider investing the cash you'd have used to pay it down, capturing the spread.
Pro tip This is exactly how Dunlap funded part of her own $100K.
- 5
Honor the personal override
If being debt-free would meaningfully improve your peace of mind, pay it off, but never neglect retirement to do so.
Watch out Paying off a mortgage into your 50s before starting retirement doesn't leave enough time to compound.
In the wild
Adele bought a roughly $30M house and took a mortgage at around 4% interest even though she could pay cash. She keeps her cash in investments earning more than 4%, so the 'debt' is actually leverage.
→ By borrowing cheap and investing the difference, she grows more wealth than she would by paying cash.
Dunlap held a car loan for a long time because it was only about 2% interest. Rather than pay it off fast, she invested the cash she would have used.
→ The invested money helped her build toward the $100K she saved.
Common mistakes
Eradicating all debt regardless of rate
Rushing to kill a 2% loan forgoes the higher return that cash could earn invested.
Neglecting retirement to be debt-free
Spending decades paying off a mortgage before saving for retirement leaves no time for compounding to work.
Is it for you?
Best for
People with a mix of debts who want to allocate cash between payoff and investing rationally.
Not ideal for
People whose emotional need to be debt-free outweighs optimization, or who won't actually invest the difference.
From the transcript
“the question... do I pay off debt or do I invest depends on your interest rate right so if it's less than you could be…”
“when you get to a certain level of financial standing debt has a new name... Suddenly It's called Leverage it's the same thing”
From the episode
Tori Dunlap: Unlocking Financial Freedom, the REAL Cause of Money Problems and How to Defeat Them for Good
Tori Dunlap