Table of Contents
1. Defining Good Debt vs. Bad Debt
Debt is neither inherently good nor evil—it is financial leverage. Used prudently, it can accelerate access to assets that appreciate faster than the borrowing cost. Used carelessly on depreciating consumer goods, it creates financial strain and delays wealth building.
2. Anatomy of Toxic Bad Debt
Bad debt carries two unmistakable traits: high interest rates (typically 12% to 30%+) and depreciating underlying assets. Examples include revolving credit cards, payday loans, financing high-end electronics, and title loans. Financing consumable lifestyle luxuries drains future earning power to subsidize temporary gratification.
Key Takeaways
- Avoid high-interest consumer debt at all costs.
- Use debt only when the expected return on the underlying asset reliably exceeds the cost of borrowing.
- Always maintain cash reserves to ensure you can service debt obligations through economic downturns.