I mentioned the idea of 'debt' in my previous post.
I picked up this idea from the Agile software community, where they call it "Technical Debt". Let me attempt a definition:
- When an activity creates an unmet need, that need is a 'debt'. As long as that need is unmet ("the debt remains unpaid"), you continue to incur increased cost ("interest").
Here's a simple example. I cook breakfast for my family. After we eat, there are some dirty dishes. I could wash them now, or leave them until later. If I leave them, the food will dry on, and it will be harder to wash them later. If I try to cook something else in the kitchen, I have to work around all the dirty dishes in my way, which makes the new task more expensive, too.
Just as with financial debt, it sometimes makes sense to pay it off now, and sometimes to wait and pay later (with interest). For example, if I need to get to work early, then it may be worth it to leave the dishes.
With my finances, I don't live with debt. I don't have a car loan, or an ongoing credit card balance, or unpaid student loans. Partly this is because I am fortunate enough to make a good income, but many of my coworkers spend all their money & more, and end up in permanent debt.
BTW, the one debt I do carry is a mortgage. I think this is a wise debt to carry. We were already paying a rent before buying a house, so the majority of the monthly obligation is not new. The value for that money is high (large house + land vs. apartment). A very small portion of each payment goes to the principle, so it's not lost. The tax breaks from owning a home are very good. Most importantly, the value of the home has increased substantially, causing a major growth in equity.