Ray Dalio is interviewed by host Nicole Lapin on the
A $12,000 kitchen renovation goes on the home equity line of credit (HELOC). A wedding gets a personal loan. A vacation sits on a credit card that never quite gets paid off. To a lender, all three are simply debt. To Ray Dalio, each debt is very different.
The billionaire investor and founder of Bridgewater Associates has a simple way of looking at borrowing: Does the debt produce more income than it costs? If not, Dalio considers it bad debt.
Dalio first made the point in 2018 (1), but it’s one Canadians should be mindful of in 2026, given that the household credit market debt-to-income has climbed to 179.6%. It’s the sixth consecutive quarterly increase, and much of that borrowing isn’t being used to buy income-generating assets or to pay for themselves.
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What Ray Dalio means by good and bad debt
In an interview with CNBC Make It (1), Dalio divides borrowing into two categories.
Good debt either creates forced savings, such as a mortgage, or is expected to earn more than it costs.
Bad debt is borrowing for something that doesn’t generate enough value or income to outweigh the cost of carrying it.
As a result, the type of debt becomes more important than other factors, such as the interest rate paid. In fact, on its own, the size of the loan or the interest rate is actually less relevant. For instance, a low-rate HELOC used to fund a rental property down payment can be good debt. A zero-interest promotional credit card balance used to cover groceries because the paycheque ran out can still be bad debt, even at 0%, because it is not building anything.
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Canadians are carrying record credit balances
As of the first quarter of 2026, Canadians now owe a combined $3.25 billion in household credit market debt, according to Statistics Canada (2). Meanwhile, our household debt service ratio, or the share of disposable income allocated to debt payments, rose to 14.75%. While dated, research from the Financial Consumer Agency of Canada (FCAC) (3) helps to explain where that borrowing is going. Among homeowners using HELOCs:
40% use the money for consumption or home renovations
34% use it for financial or non-financial investments
26% use it to consolidate existing debt
Home renovations sit in a grey area. A renovation that adds resale value may behave more like an investment. A reno that’s primarily cosmetic leans more toward consumption, no matter how much you enjoy it.
Regardless of current household debt levels, the Bank of Canada’s latest Financial Stability Report (4) notes that households have generally remained resilient, but debt levels remain elevated, and many borrowers continue to face higher mortgage payments as their mortgages renew at today’s interest rates.
Apply Dalio’s test to the debt you are carrying. A HELOC used to buy an income property or invest is productive, provided the return covers the interest cost. A mortgage on the home you live in counts as good debt under Dalio’s forced-savings logic, since it builds equity you would otherwise be less likely to save. A student loan that leads to a substantial wage increase can be productive. On the flip side, a personal loan, credit card balance, or HELOC draw to cover a vacation, wedding, or depreciating vehicle is consumer debt, regardless of the interest rate.
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Where to direct your cash flow once bad debt is cleared
Paying off high-interest consumption debt reduces your interest costs and creates extra monthly cash flow. The next step is to make sure that money doesn’t disappear back into everyday spending.
One option is to redirect your former debt payments into registered accounts. The Tax Free Savings Account (TFSA) contribution limit for 2026 is $7,000. Someone who has been eligible since 2009 and has never contributed would now have $109,000 of cumulative contribution room. Meanwhile, the Registered Retirement Savings Plan (RRSP) contribution limit for 2026 is 18% of earned income, up to a maximum of $33,810.
Whether you prioritize a TFSA or RRSP depends on your income and tax situation. The important thing is to preserve the monthly payment you just freed up, rather than allowing it to become part of your regular spending, as that would defeat the purpose of paying off the debt.
Dalio’s framework doesn’t mean that you should never borrow money. A mortgage, business loan, or investment HELOC can all play an important role in building long-term wealth. But his framework offers a filter for evaluating the debt you already have and any new debt you’re considering taking on.
Remember, before carrying a balance forward or borrowing again, ask one simple question: Will this debt produce more than it costs? If the answer is no, it probably belongs at the top of your payoff list.
What to do now
The good news is that you don’t need to overhaul your finances overnight. Start by taking an honest look at the debt you already have and asking whether it’s helping you build wealth or simply financing today’s lifestyle.
A quick debt review can help you prioritize what to pay off first:
List every debt you carry, along with its interest rate and what it originally paid for.
Ask yourself whether each debt is likely to produce more value or income than it costs
Prioritize paying off the highest-interest consumption debt first, rather than focusing on the biggest balance.
Once that debt is gone, redirect the monthly payment into a TFSA or RRSP instead of letting it disappear into everyday spending.
Before using a HELOC or credit card for lifestyle purchases, decide whether you’re making a smart financial decision or simply falling into a borrowing habit.
The goal isn’t to eliminate every dollar of debt. It’s to make sure the debt you carry is working for you, not against you.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see ourethics and guidelines.
CNBC (1); Statistics Canada (2); Government of Canada (3); Bank of Canada (4)
