Debt is a simple and powerful concept— borrow now, pay more later.

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Thinking about debt, I had the striking realization1:

Debt time-shifts money

Which is to say—

Debt borrows from your future, for the present

Optimistically— you’ll have more money in the future, so use some of it now.

Pessimistically— you’re trading future comfort and freedom for less now.

∅ ⊙ ∞

Future money can be used wisely or foolishly. A cunning use of debt raises the odds you’ll earn substantially more later (e.g., student loans2 or sound investments). But many use debt in ways that offer no future benefit. Worse, it can easily reduce future earnings3.

Debt is a lever4. Most often, the lever favors the issuer, not you. Many people don’t understand the risks of borrowing. A little bad luck or poor timing can wreck your life.

Devastatingly, debt compounds— an effect that’s unintuitive and often underestimated, especially when it works against you3. As a result, interest can balloon a manageable loan into a crushing burden.

This is how debt creates immense hardship for borrowers, and incredible profits for lenders5.

Before borrowing, protect yourself by:

  • Calculating the total cost of borrowing
  • Evaluating the realistic risk of default, and its consequences6
  • Doing the math yourself (or getting help from someone you trust)7

Never borrow to live beyond your means. Avoid unfavorable terms. High-interest debt is particularly dangerous.

Before borrowing, ask:

  • Can I make do with less?
  • Can I save or delay instead?
  • Can I avoid debt through sacrifice?

Debt can work in your favor only if you understand the system. Learn the rules. Know the risks. Countless lives have been ruined by misunderstanding money and debt, or failing to imagine and prepare for unexpected or unfortunate circumstances. Don’t be one of them.

♘ ♖ ♘

  1. You borrow from expected future earnings at extra cost (interest). Often, repayment is spread over time, disguising the true cost. ↩︎

  2. Not all areas of study or schools increase your odds of earning more. ↩︎

  3. See Debt is a Trap for more thoughts. ↩︎ ↩︎

  4. The placement of the fulcrum or the length of the lever determines the ease or difficulty of moving an object. ↩︎

  5. In different periods of history, it has been immoral or illegal to borrow or lend money with interest. See Usury. ↩︎

  6. Before taking on debt, make sure your future is strong enough to repay it. Few expect to default, or anticipate the difficulties that come with a debt cycle. ↩︎

  7. The better you understand the details, the more you’ll appreciate what’s at stake. ↩︎