What is Debt?

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What is Debt?

Debt to most feels like a dark, looming cloud or a weight that slows us down. The total amount of money owed is debt. It comes in many disguises like a house, a new car, a diploma, or a trip to the Caribbean to name a few. No matter the disguise, debt is either secured or unsecured.

Secured debt is debt backed by an asset as collateral (Ex: car loan, mortgage, etc). Failure to pay this debt can result in the seizure of the collateral asset.

Unsecured debt is debt with no collateral (Ex: personal loan, credit card, etc). Failure to pay this debt can result in a lawsuit, debt collector hounding or wage garnishment.

In finance, debt is a negative. We should acknowledge it as a negative and understand its impact on our financial lives. Viewing debt as a negative can affect how we handle it; but, when handled correctly it can become a positive. Try looking at debt from a risk vs. reward perspective instead of only reward. Reward will say “I’m getting a new car”, while risk vs. reward will say “I want to pay off my car quicker than it depreciates”.

It’s important to know the risks and rewards involved with debt. One risk is that the asset can depreciate quicker than the debt is paid off. One reward is obtaining a means of transportation or even independence. Debt is a critical part of life and can be scary. How we view and manage it will determine our success. Once you can learn to master debt, your finances will be less stressful.


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