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Not too many concepts impress one of history’s greatest minds, but here’s one that does:

Einstein quote re compound interest

In 2014, American consumers had a gargantuan total of $11.7 trillion dollars in outstanding debt. Fortunately, most of this was on items like mortgages and student loans.

Still, Americans had $882.6 billion in credit card debt, which amounts to $15,611 per household. That’s impressive, but not necessarily in a good way.

The principle of debt is rather simple: borrow money now and pay it back in the future, with interest. Thereby, anything bought with debt will cost more than it would have otherwise.

And, with credit card debt, it’s a lot more. Something you bought for $100 today will cost, say, $115.68 next year.

There are, generally speaking, two types of debt.

good debt vs bad debt

The good kind allows one to realize a return, financial or otherwise. So, mortgage debt used to purchase a house would often qualify as good debt because houses will, in the long run, appreciate.

Debt for starting a business or purchasing an investment vehicle can also be good, since the goal is to make more than the cost of repayment.

Student loans can be good debt, too, because we invest in our earning potential and/or personal improvement and fulfillment. Other debts, such as those to pay for medical expenses and the like, may not be good, but they are necessary.

That being said, virtually any debt on a depreciating asset, or something that doesn’t allow us to grow as individuals should be qualified as bad debt.

bad debt

Patience is a virtue, and a lack of patience is quite expensive. It’s what economists call time preference.

Effectively, an individual’s time preference is the relative value placed on a good now versus at some point in the future. The less time you’re willing to wait, the more you’ll end up paying because of the interest that will accumulate during that time.

Rent-to-own electronics and even cars are simply transfers of wealth from the impatient to the patient. Bad debt means you are obligating yourself to work in the future to pay off whatever you’re buying today.

Why make such obligations?

The work you do should pay for the present and build a nest egg for the future, not just allow you to pay off something you’ve already used up. Behind all of this is, perhaps, the greatest key to success in life: the deferral of gratification.

And, thereby, it’s one of the most important skills to nurture in yourself. The moral of the story is simple: Consumer debt represents the first marshmallow.

And, yes, with the smörgåsbord of cool, new consumer products deftly marketed everywhere and massive companies willing to throw billions at advertising, such temptations are plentiful.

But, it’s a dangerous and backwards game to play.

debt time bomb

In the end, building a nest egg and having enough disposable income to do what you would like in life involves saving money, not paying through the nose for things that will become all but worthless by the time they’re paid off.

Even a new car loses more than 10% of its value the moment you drive it off the lot!

And, the more bad debt a person has, the worse his or her credit score will be — and the more likely he or she is to default — making it that much harder to acquire good debt and get it at a good interest rate.

Split your debt into the good and bad categories and leave the bad type for good. Make it a rule instead of a recommendation.

Going into debt because there’s no other choice is one thing; otherwise, debt should only be used as an investment. Even auto loans should be avoided, if possible.

Bad debt, which includes virtually all consumer debt, leaves you running, just to stay in the same place. Avoid it like the plague.

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