So, we’re going to figure this out today, together. Don’t worry; it’s not going to be that bad! Yes, the word “debt” sounds scary, but it doesn’t have to be. In fact, debt can be your friend in many circumstances—or your mortal enemy.

What actually is Debt?

Let’s get into debt—not literally, but let’s learn about it. What does debt and interest mean to you? Consider:

• Credit cards, loans, bonds

• Dividend yields on stocks

• Savings accounts

• And even inflation. Yes, that’s like negative interest on the cash in your pocket right now. If you want to understand money, you’ve got to understand debt.

Debt Isn’t Evil

Debt isn’t inherently bad; it’s only harmful if you’re not earning more than the cost of the debt. If this sounds confusing, don’t worry—you’ll understand by the end.

Key Mistakes with Debt

1. Not Paying Off the Worst Debts First

   Many people neglect the debts with the highest interest rates. I’ll show you which ones to tackle first.

2. Ignoring Relative Interest Rates

   Focusing solely on absolute interest rates can lead you to make unwise financial decisions.

3. Believing Cash Can’t Lose Value

   Just because cash is “safe” under your mattress doesn’t mean it holds its value. Inflation reduces its purchasing power every day.

Quick Breakdown

1. What is Interest?

   I’ll introduce the “risk-adjusted model of interest”—my unique way of explaining interest that’s simpler than it sounds.

2. Common Debt Mistakes

   Avoid the biggest pitfalls that trap people in debt cycles.

3. Debt Management Strategies

   I’ll outline a system to tackle debt by addressing the most dangerous risks first.

4. Bonus Round: Using Debt to Make Money

5. Learn advanced techniques on how wealthy people leverage debt to grow their wealth.

What is Interest?

Interest accounts for the risk between a borrower and a lender. Let’s say you lend $10 to “Uncle Tony,” a known risk-taker. Uncle Tony might not pay you back, so you charge a higher interest rate. But if you loan to a big, stable bank with lots of assets, the interest rate is lower since they’re less likely to default. You pay more to account for risk: Uncle Tony is risky, the bank is not.

Another critical factor is collateral. For example, if Uncle Tony gives you his shoe as collateral, you can sell it if he doesn’t repay you. Collateral reduces risk, which is why secured debts like car loans or mortgages have lower interest rates than unsecured debts like credit cards.

Common Debt Mistakes

– The Devil is in Your Pocket

Credit card debt is often the most dangerous type. It’s unsecured and usually has high interest rates (often 20%+). Even if you have excellent credit, credit card rates can still be high. This is because credit card companies see you as the risk.

If you’re not earning at least 20% more on your job, running up credit card debt is unsustainable. Many entrepreneurs take on this kind of debt with the expectation of high returns, but that’s a gamble. For most people, a lower-interest loan or a personal loan secured by assets is a better choice.

Creating a Debt Management Plan

Step 1: List All Debts

Write down every debt you owe, but don’t sort by amount owed. Instead, sort by interest rate—highest first.

Step 2: Pay Off High-Interest Debts First

It might be tempting to clear smaller debts first, but always start with the highest interest rates. This is the key to reducing financial strain over time.

Using Debt to Build Wealth

Let’s think about debt like wealthy people do: borrow cheap and buy assets. If you’re able to borrow at a low rate, you can invest in assets that generate a higher return than the interest you’re paying. For example, if you borrow money at 5% and invest it in a rental property with an 8% return, you’re effectively making a 3% profit on borrowed money.

But don’t settle for small margins! Look for opportunities with higher returns, like 15–30%, by investing in businesses or income-generating assets.

Debt, when managed well, can be a powerful tool. Think of debt as the cost of capital—the price you pay to kick off an investment or project. It all comes down to borrowing at one rate and earning a higher rate through strategic investments.

This is just a quick dive into the basics of debt and macroeconomics—there’s so much more to explore… From understanding different types of debt and how countries manage them, to analyzing their effects on individual wealth and national economies, I’ve barely scratched the surface. If you’re interested in going deeper, let me know!

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Cheers,

Jonas