Debt

1. Definition

Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. * In finance, it is often referred to as "Leverage" because it magnifies the potential return (and risk) of an investment.

2. The Concept: Buying Time

Debt allows individuals and corporations to move future consumption to the present. * Instead of saving for 30 years to buy a house, you borrow money to buy it today and pay it back over time with interest. * The Interest is the "cost of renting money" or the price of time.

3. Good Debt vs. Bad Debt

• Good Debt: Used to acquire assets that grow in value or generate income (e.g., Mortgage, Student Loan, Business Loan). The goal is for the asset's return to exceed the interest cost.
• Bad Debt: Used to purchase depreciating assets or for consumption (e.g., Credit Card debt for vacations or luxury goods). This destroys wealth.

4. Risks

• Insolvency: The inability to pay debts as they become due. This leads to bankruptcy.
• Foreclosure: If the debt is secured by an asset (Collateral) like a house or car, the lender can seize the asset if payments are missed.