Learn / Part 3 · Inside the Financial System
Making Debt Decisions
How should you decide whether, and how, to borrow?
In brief
Debt is a tool: it can build or destroy wealth. Good decisions compare the cost of borrowing with the alternative, set a ceiling you can live with, and plan the order of repayment.
Key ideas
Cost versus benefit
Borrow only when the benefit outweighs the total cost, in your own terms.
Make an insight card →Order of repayment
Pay the highest rate first; use a smaller-balance-first rule only if motivation needs it.
Make an insight card →Try it
Debt payoff planner
Add up to four debts and a monthly amount you can put toward them. Compare the main strategies on time and total interest.
Open the full page: formula, variables, worked example and cautions →
Also relevant: Borrowing capacity & debt-to-income, Compare two loan offers
Red flag
Borrowing to pay other borrowing, with no plan to reduce the total.
Ask before you sign
- What is the cheapest way to fund this, including not doing it?
- What happens if my income falls?
Do this week
Calculate your debt-to-income ratio and set a personal ceiling.
Try it · 10–45 minutes
List every debt with balance, rate and minimum; choose an order.
See it in a life
Cases that bring this chapter to life
Connected ideas
Where else this shows up
Pause and reflect
Private to this device. Nothing is sent anywhere.
Words worth knowing
- Debt-to-income ratio (DTI)
- Your monthly debt payments divided by your monthly income. Lenders use it to judge how stretched you are.
- Stress test
- Checking whether a plan would survive a bad but plausible event, such as higher rates or lost income.
- Default
- Failing to meet the terms of a loan, usually by missing payments for a defined period.
- Secured loan
- A loan backed by collateral. Rates are usually lower, but the lender can take the asset.
Companion notes written for this website, based on the topics of Chapter 14. They explain ideas and do not reproduce the book. General information, not personal advice.