Learn how to understand, manage, and pay off debt while using credit wisely to achieve your financial goals.
Start Learning!Hey there! Welcome to Debt Management, where we'll tackle one of the trickiest parts of personal finance—debt. Debt can feel like a heavy backpack you're lugging around, but with the right tools, you can lighten the load and even use it to your advantage.
In this lesson, you'll learn what debt is, how it works, and smart strategies to manage it. Whether you're already dealing with debt or just want to avoid it, this guide will help you feel confident and in control. Let's get started!
Imagine you want to buy a $1,000 laptop, but you only have $300. You could borrow $700 from a friend or use a credit card, promising to pay it back later. That $700? That's debt—money you owe to someone else. Debt isn't always bad, but it can become a problem if you don't manage it wisely.
Debt is money you've borrowed and need to repay, often with extra costs called interest. It can come from:
Debt can be a tool or a trap:
Meet Taylor, a 24-year-old graphic designer. Taylor took out a $10,000 student loan (good debt) to pay for design school, which helped land a $50,000 job. But Taylor also racked up $2,000 in credit card debt (bad debt) on clothes and dining out. The student loan is an investment; the credit card debt is a burden.
Do you have any debt right now (even small, like owing a friend)? If not, what's one thing you might borrow for in the future? Write it down.
Example: "I owe my roommate $50 for pizza."
Got it? Let's dig deeper into how debt works.
Debt isn't just the amount you borrow—it grows over time thanks to interest. Interest is the cost of borrowing, and it can make debt feel like quicksand if you're not careful.
You charge $500 on a credit card with 18% compound interest. If you don't pay it off, that $500 could balloon to $590 in a year—and it keeps growing. Yikes!
Calculate the interest on your own loan scenario:
Formula: Interest = Principal × Rate × Time
Interest Amount: $0.00
Example calculation: $200 × 0.10 × 2 = $40
Paying only the minimum on a credit card keeps you in debt longer. For a $1,000 balance at 18% interest, paying $25/month takes over 5 years to clear—and costs $500 extra in interest!
Understanding these basics helps you see why managing debt is so important.
Not all debt is created equal. Let's break down the difference between good debt and bad debt—and how to use debt wisely.
Definition: Debt that can improve your future or build wealth.
Examples:
Why It's Good: It's an investment in yourself or an asset.
Definition: Debt for things that lose value or aren't essential.
Examples:
Why It's Bad: It costs you more without improving your life.
Alex took out a $5,000 loan for a coding bootcamp (good debt), which helped land a $70,000 job. Meanwhile, Sam used a $5,000 credit card for a fancy vacation (bad debt), which left him paying interest for years.
Think of one debt you have (or might take on). Is it good or bad? Why?
Example: "My $200 bike loan is good debt—it helps me commute to work."
Ask yourself: "Will this debt help me earn more, save money, or improve my life long-term?" If not, it's probably bad debt.
Knowing the difference helps you borrow smart.
If you've got debt, don't panic—you can tackle it with the right plan. Here are two popular strategies to pay off debt faster and save on interest.
How It Works: List your debts from smallest to largest. Pay minimums on all, but throw extra cash at the smallest debt. Once it's gone, roll that payment into the next smallest.
Why It Works: Small wins keep you motivated.
Best For: People who need quick wins to stay on track.
How It Works: List your debts from highest interest rate to lowest. Pay minimums on all, but focus extra payments on the highest-interest debt first.
Why It Works: Saves you the most money on interest.
Best For: People who are motivated by numbers and long-term savings.
You have three debts:
With the snowball method, you'd pay off Credit Card A first, then B, then the student loan—celebrating each win!
Which method sounds like you—snowball or avalanche? Why?
Example: "Snowball—I need those quick wins to stay pumped!"
Set up automatic payments for at least the minimums to avoid late fees and protect your credit score.
Let's say you have $200 extra each month to pay off debt:
Both work—pick what fits your style.
The best way to manage debt? Avoid it when you can! Here's how to live within your means and steer clear of unnecessary borrowing.
Think of something you want that costs over $200. How could you save for it instead of borrowing?
Example: "I want a $300 jacket. I'll save $50/month for 6 months."
Meet Mia, a 20-year-old student. Instead of taking a $2,000 loan for a spring break trip, she saved $200/month for 10 months. No debt, no stress—and the trip felt even sweeter!
Before making a big purchase, wait 24 hours. If you still want it, check your budget. If not, you've saved yourself from impulse debt.
Avoiding debt is like dodging raindrops—stay prepared, and you'll stay dry.
If you're already in deep, don't worry—there are ways out. Here's how to handle debt when it feels overwhelming.
If you have debt, list it below with amounts and interest rates. If not, write one debt you want to avoid.
Example: "$500 credit card at 18%, $2,000 student loan at 5%."
Paid off a debt? Treat yourself (within reason)—it keeps you motivated.
Meet Jake, who had $3,000 in credit card debt at 20% interest. He used the avalanche method, focusing on the highest-interest card first. He also called his creditor and got the rate lowered to 15%. In 18 months, he was debt-free!
You've got options—don't be afraid to use them.
You're almost there! Let's reflect on what you've learned and test your debt management skills.
What's one debt strategy or tip you'll use (or avoid)? How will it help you stay in control?
Example: "I'll use the snowball method—it'll keep me motivated to pay off my $200 medical bill first."
Question 1: What's the difference between good and bad debt?
Question 2: Which method saves the most on interest?
Question 3: What's a minimum payment?
Question 4: How can you avoid debt?
Question 5: If you're overwhelmed by debt, what's a good first step?
Imagine you have two debts: $300 at 10% interest and $500 at 15%. Using the avalanche method, which do you pay first? Why?
You did it—you've tackled the debt dragon! You've learned what debt is, how it works, and smart strategies to manage or avoid it. Remember, debt isn't inherently bad—it's how you handle it that counts. With the tools from this lesson, you're ready to take control, make informed decisions, and keep your financial future bright.
You're not just managing debt—you're mastering it. Keep going, you've got this!