Debt is when one person or company owes money to another person or company. When you borrow money (take out a loan), then you’re in debt.
Story: The Debt Backpack
Debt can be very simple (‘you owe me $5’) or it can be very complicated, with lots of complex terms and conditions (payment schedules, interest rates, collateral covenants etc).
But either way, if you’re in debt, you’re carrying around a burden… like a backpack. The heavier the backpack, the more it slows you down. And the bigger it is, the harder it is to get rid of.
There’s many different types of debt (loans) individuals can take on: credit card debt, student debt, mortgages, auto loans, medical debts, payday loans, and so on. Businesses and governments can also take on debt, by issuing bonds (big IOUs) in return for cash, or by borrowing cash from a bank or investor.
The reason debt exists is to let you take a chance wouldn’t otherwise be able to, which might lead to success you otherwise wouldn’t be able to have. For example, going to school to earn a degree so you can command a higher salary later. Or opening and growing your own business.
Sometimes debt works out ok. But often, it just ends up being a heavy, burdensome backpack.
In the old days, debt was uncommon, and frowned upon – in fact, people who owed money and couldn’t pay it back were thrown in something called “debtor’s prison.”
Even more recently, almost no one carried around a backpack full of debt. But today, most people do. Credit cards and banks have made it really easy to borrow money, and really hard to understand the terms (like interest rates). Many peoples’ backpack just gets heavier and heavier.
One of the biggest things you can do to succeed in life (or in business) is to really understand debt and how it works.
But if you don’t have time for that… just carry around a fifty pound backpack for ten hours on a really hot day, and you’ll get the idea.