Debt Management
Not all debt is bad. A 3% mortgage on an appreciating asset is different from 24% credit card debt on depreciating purchases.
The distinction matters. One builds wealth. The other destroys it.
Good Debt vs. Bad Debt
| Type | Interest | Asset | Verdict |
|---|---|---|---|
| Credit card | 15-25% | Consumption | Bad — eliminate immediately |
| Car loan | 5-10% | Depreciating | Usually bad — minimize |
| Student loan | 4-7% | Future earnings | Depends — ROI of degree matters |
| Mortgage | 3-7% | Appreciating | Usually good — leverage is reasonable |
| Business loan | Varies | Cash flow | Depends — if ROI > interest rate |
The rule: If the debt finances something that increases in value or income faster than the interest rate, it might be good. Otherwise, it’s bad.
The Priority Order
- Minimum payments on everything — Protect credit score
- High-interest debt (>10%) — This is an emergency. Attack aggressively.
- Medium-interest debt (5-10%) — Pay faster than required
- Low-interest debt (<5%) — Pay on schedule, invest the difference
The Math That Changes Behavior
$5,000 credit card at 20% APR, minimum payments only:
- Time to pay off: 25+ years
- Total paid: $15,000+ (3× original)
You’re not paying for that purchase. You’re paying for it three times.
Decision Framework
Should I take on this debt?
- Is the interest rate below 7%?
- Does it finance an appreciating asset or higher income?
- Can I comfortably make payments at 35% of income or less?
- Do I have an emergency fund first?
If any answer is no, reconsider.
Should I pay off debt or invest?
- Interest rate >7%? → Pay debt (guaranteed return)
- Interest rate <5%? → Invest (likely higher return)
- In between? → Split or follow your psychology
High-interest debt is a wealth emergency. Low-interest debt is a strategic tool.
See Anti-Patterns for common debt mistakes.