debt
Money borrowed by one party from another that must be repaid, typically with interest.
Example
“She worked hard to pay off her student debt within five years of graduating.”
Memory Tip
DEBT has a silent B — like the B is the burden hiding in your finances that you don't want to talk about.
Why It Matters
Not all debt is created equal. High-interest consumer debt destroys wealth while low-interest debt used to acquire appreciating assets can build it. The key distinction is whether the debt funds consumption like dining out or investment like a mortgage on appreciating real estate.
Common Misconception
The popular advice to avoid all debt misses important nuance. Most wealthy people use debt strategically through mortgages business loans and investment leverage. The goal is not zero debt but ensuring the return on what you finance with debt exceeds the cost of that debt.
In Practice
The debt avalanche method prioritizes paying off highest-interest debt first while making minimum payments on everything else. On a credit card charging 24% APR every dollar of debt costs you 24 cents per year in interest. Eliminating that debt first generates an immediate guaranteed 24% return better than almost any investment available.
Etymology
From Latin 'debitum' meaning 'thing owed' — what is owed.
Common Misspellings
Learn personal finance fundamentals free
Related Terms
More in fundamentals
Other fundamentals terms you should know
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.