When we talk about debt, we almost always speak from the perspective of the person who owes money to a bank. A citizen has a mortgage, a company has a credit line, an investor has project financing, and a government issues bonds. In this picture, the bank appears as a creditor — an institution that has money and lends it to others. However, this picture of the financial system is incomplete. Banks are simultaneously among the largest debtors in the modern economy. The money we hold in our accounts is not merely our asset. On the other side of the balance sheet, it represents the bank’s liability to us.

This is where the more interesting story about debt begins. The modern economy is not divided into wealthy creditors and poor debtors. It is an enormous network of mutual claims and obligations. A citizen owes a bank money for a home, a bank owes a citizen the balance of their deposit, a government owes the owner of a government bond, a company owes banks and investors, while an investment fund has obligations toward its investors. The same institution can simultaneously be a major creditor and a major debtor. That is why the word “debt” alone says very little about someone’s financial strength.

If someone deposits one million euros in a bank, in everyday language we will say that they “have one million euros there.” That is practically understandable, but economically the relationship is more complex. The depositor has a claim against the bank, while the bank has a liability toward the depositor. The bank then uses its balance sheet to finance loans to households, companies and investors, to hold securities, and to manage liquidity. This is how capital circulates. Money does not remain motionless in a vault waiting for its owner; instead, it becomes part of a much larger system for financing the economy.

For this reason, banking rests on something much more important than physical money — trust. The depositor trusts that the bank will execute their payment when they request their money. The bank trusts that the borrower will service the loan. The investor trusts that the project will generate sufficient cash flow. The bondholder trusts that the issuer will pay interest and repay the principal. When trust functions, capital moves from where it is not currently needed to where it can be used productively. When trust disappears, even a financial system that looks strong on paper can very quickly experience a liquidity problem.

Not All Debt Is the Same

That is why the question of a serious investor should never be simply: “How much does someone owe?” Much more important questions are: who is the debt owed to, at what price, for what term, in what currency, from which cash flows will the debt be repaid, and — perhaps most importantly — what was created with that money?

There is an enormous difference between millions of euros of debt used to finance consumption and millions used to build an asset capable of generating income for decades. Debt used to finance a high-quality office building, a production facility, a hotel, an energy project or a company with stable cash flow is economically not the same category as debt incurred to permanently cover losses. The nominal amount may be identical, but the quality of those liabilities is not.

This brings us to a concept that is still often misunderstood in the Balkans — leverage, or the use of borrowed capital to increase investment capacity. Debt itself is neither good nor bad. It is an instrument. Like any instrument, its outcome depends on its cost, structure, risk and the way it is used.

If we can obtain capital at a cost that is sustainably lower than the return on a high-quality investment, debt can accelerate value creation. If, however, short-term and expensive money is used to finance long-term illiquid assets, problems can arise even when the investment itself is good. An investor can then be wealthy on the balance sheet while simultaneously lacking the cash needed to service their obligations.

This is why finance makes a major distinction between solvency and liquidity. You can own assets worth ten million and still have a problem paying one million tomorrow. Likewise, you can have a large amount of cash and a very weak long-term business model. Financial strength cannot be measured by a single number.

Why Do Very Wealthy People Borrow Money?

At first glance, it seems illogical for an individual or company with substantial assets to use loans at all. If they have sufficient capital, why not simply pay for the investment with their own money?

The answer lies in the cost of capital and opportunity cost. Capital that we spend on one investment is no longer available for another. If an investor owns a high-quality portfolio of securities, real estate or stakes in companies, selling those assets to finance a new project may be more expensive and less rational than borrowing. That is why large investors often think not only about how much something costs, but about which source of capital is the most efficient.

This creates one of the biggest differences between the consumer’s and the investor’s understanding of money. A consumer generally thinks about the price of an item. An investor thinks about the cost of the capital used to finance that item.

A five-million-euro property is not simply a five-million-euro property. It can be purchased with equity, partially financed with a loan, acquired through a company, financed on a project basis, or combined with other instruments. Each of these structures produces a completely different return on equity and a completely different level of risk.

A Bank and an Investor Are Actually Doing Something Similar

At their core, a bank and a serious investor ask the same question: how should capital be allocated so that the relationship between return, risk and liquidity is acceptable?

A bank collects sources of funding and deploys capital through loans and other assets. An investor allocates their own and borrowed capital among companies, real estate, bonds, shares and other projects. Both must pay attention to maturities, interest rates, cash flows and risk.

The most dangerous situation arises when maturities cease to match. If debt matures in one year while an investment can realistically return capital only in ten years, the investor depends on refinancing. Everything works as long as the market is willing to refinance the existing debt. But if conditions change, the price of money rises or lenders become more cautious, what looked yesterday like a perfectly sustainable structure can become a serious problem.

That is why large capital is not built merely by buying good assets. It is also built by financing those assets correctly.

Sometimes Equity Is the Most Expensive Capital

There is another idea that initially seems paradoxical: your own money is not free.

If we have one million euros and invest it in a project that generates three percent annually, while we could have invested the same capital elsewhere at an acceptable level of risk for a six-percent return, the difference represents a real economic cost of our decision. No one will send us an invoice for that cost, but it exists.

That is why serious companies calculate the cost of both debt and equity. For precisely this reason, a company that has a significant amount of cash on its account may still take out a loan. The question is not: “Why borrow when you have your own money?” The real question is: “Which form of capital is more rational to use at this moment?”

Of course, this does not mean that more debt is automatically better. Leverage magnifies results in both directions. When an investment succeeds, it can significantly increase the return on equity. When an investment fails, it can increase the loss just as effectively. Debt does not create the quality of a project. It merely amplifies the economic consequences of the quality or poor quality of a decision that has already been made.

Wealth Is Not a Single Number

That is why I am increasingly less impressed by how much assets someone owns and increasingly more interested in the structure behind that figure.

If a company owns one hundred million worth of real estate, I want to know how much debt is secured against it. If it owes fifty million, I want to know when that debt matures. If maturity is approaching, I want to know what kind of cash flow the assets generate. If the interest rate is variable, I want to know what happens when the cost of money rises. If everything is financed short-term, I want to know whether there is a refinancing plan.

Only then does the figure of one hundred million acquire real meaning.

The same applies to banks, funds, governments and private investors. A large balance sheet is not the same as a strong balance sheet. Large assets are not the same as high-quality assets. High revenue is not the same as strong cash flow. And large debt is not necessarily a sign of weakness, just as the absence of debt is not automatically proof of financial wisdom.

Debt Is a Promise About the Future

At its core, every debt represents a promise about the future. We take out a loan today because we believe that what we create tomorrow will be valuable enough to repay the capital we use today.

That is why debt and optimism are much more closely connected than is commonly believed. Large infrastructure projects, factories, hotels, residential complexes and companies would be difficult to build if every generation first had to accumulate all the necessary capital and only then begin construction. Credit makes it possible to mobilize part of future value today.

But precisely because of this, debt requires responsibility. Today we make a decision that future revenues will have to justify. When we borrow to invest, we are essentially claiming that the future will be productive enough to pay for our present decision.

This is where mathematics ends and the character of the investor begins.

A spreadsheet can calculate interest. A model can project cash flow. A bank can assess collateral. But no one can mathematically guarantee the quality of every business decision that will be made over the next ten or twenty years.

That is why the best investors do not manage capital alone. They manage time, risk and trust.

Capital Should Work, but a Person Must Know Why

After a certain amount of time, a person begins to look at money differently. At first, they want to earn it. Then they want to preserve it. Then they want to multiply it. And perhaps the most important stage is when they begin to ask what they want to build with it.

Because money that simply sits there is security, but well-directed capital can become a building, a company, a job, a scholarship, a hotel, a factory, a school or a project that will exist much longer than its investor.

That is why debt is not the opposite of wealth. Nor is money its complete measure.

True financial strength lies in the ability to understand the relationship between what we own, what we owe, what we create and the time required to achieve it.

In the end, perhaps the most important lesson of economics is very simple: what matters is not how much capital we control, but what kind of value we create with that capital.