Should You Use Cash or Leverage for a Major Purchase? How Financial Planners Help You Decide

As Certified Financial Planners™, the team at Financial Life Advisors is often asked a version of this question:

At what point does it make more sense to use leverage instead of cash for a large purchase?

It’s a smart question, and one that doesn’t have a one-size-fits-all answer. Deciding whether to pay cash or use leverage requires balancing financial efficiency, liquidity, risk tolerance, tax considerations, and personal comfort. The goal isn’t just optimization on paper, but confidence and flexibility in real life.

When Does Leverage Make Financial Sense?

From a mathematical standpoint, leverage may be attractive when the after-tax cost of borrowing is lower than the expected long-term return on your investments.

For example, if you can borrow at an after-tax rate of 5% while your long-term investment strategy is expected to earn 7–8%, staying invested and financing a purchase may improve projected outcomes. Inflation can further tilt the scale, as fixed-rate debt becomes less expensive in real terms over time.

However, expected returns are never guaranteed. Markets fluctuate, timing matters, and relying solely on projections ignores volatility and behavioral risk. Smart financial planning looks beyond interest rate comparisons to understand how leverage fits into your broader wealth management strategy.

Liquidity: The Often-Overlooked Factor

Liquidity, your ability to access cash when needed, is frequently the deciding factor in whether to borrow or pay cash.

While paying cash reduces debt, it can also leave you asset-rich and cash-poor, limiting flexibility when unexpected events arise. These might include a job loss, business slowdown, medical expense, or an unplanned opportunity that requires immediate capital.

Maintaining adequate liquidity allows you to manage uncertainty without being forced to sell investments at an inopportune time or take on unfavorable debt later. For many clients, preserving liquidity is just as important as minimizing interest expense. 

Risk Tolerance and Peace of Mind Matter

Leverage amplifies outcomes, both positive and negative.

While borrowing can enhance long-term growth in favorable markets, it also increases vulnerability during downturns or income disruptions. This risk is especially relevant for individuals approaching or in retirement, where capital preservation and income stability become priorities.

For many clients, reducing complexity and uncertainty provides value that doesn’t show up in a spreadsheet. Owning assets outright — particularly discretionary or non-income-producing purchases — can offer emotional comfort, stability, and peace of mind.

Tax Considerations Can Change the Equation

Taxes play a critical role in deciding whether to use cash or debt.

Certain interest expenses, such as those associated with mortgages or home equity lines of credit, may be tax-deductible depending on your situation. Meanwhile, investment assets may benefit from tax deferral or favorable long-term capital gains treatment.

This is why effective wealth management decisions are always evaluated using after-tax costs and after-tax returns, not just headline interest rates. Tax efficiency is an integral part of comprehensive financial planning.

When Does Home Refinancing Make Sense?

Refinancing your primary residence can be beneficial if it lowers your effective interest rate, improves cash flow, or reduces risk by converting an adjustable-rate loan to a fixed rate.

However, refinancing solely to extend debt or speculate with borrowed funds can introduce unnecessary risk and closing costs that may outweigh the benefits. Each refinancing decision should be evaluated within the context of your long-term financial plan.

The Bottom Line

Leverage is a financial tool,  not a strategy by itself.

The right decision balances numbers, liquidity, risk tolerance, tax implications, and personal priorities. At Financial Life Advisors, we help clients evaluate these factors holistically, aligning major financial decisions with long-term goals.

The best answer is the one that allows you to move forward confidently, with a financial structure that supports flexibility, resilience, and peace of mind.

Josh Hussong CFP®

Investment Advisory and Financial Planning Services are offered through Financial Life Advisors, LLC.