“Smart men go broke three ways: Liquor, ladies and leverage.” - Charlie Munger
For an in-depth exploration of debt, I recommend reading David Graeber's book Debt: The First 5000 Years.
Understanding Debt and Its Foundations
Debt, much like laws and societal rules, is an abstract concept. While it may seem intangible, robust systems are in place to enforce financial obligations. Laws, by definition, represent the agreed-upon rules of a community. Financially speaking, debt is simply an amount owed to another party. The financial system operates using money, which functions as a tool for maintaining a ledger—a system for tracking and managing debts.
The Subjectivity of Value and Currency
Services, skills, material objects, and time all carry value. The means by which we measure these values is through money or currency. However, value itself is highly subjective. Each person assigns different levels of importance to skills, objects, and time based on individual priorities.
The Nature of Debt: Good vs. Bad
When you purchase something on credit, you are signaling that the item is valuable enough to trade your time and money over an extended period to pay for it. This has given rise to the notion of "good" and "bad" debt. Investable debt—used to develop skills or assets that create long-term value—is often considered beneficial. For instance, investing in education can be a good decision if it enhances your ability to contribute to society. However, if an expensive degree lacks demand in the job market, the return on investment may be low. Taking on $500,000 in student loans for a degree with minimal market value can result in financial hardship.
Interest Rates and Risk Assessment
Financial institutions use time-value equations to determine interest rates, which represent the cost of money over time. This connects to opportunity cost—every financial decision involves choosing one option at the expense of another. Riskier investments demand higher interest rates to compensate lenders for potential losses. The field of actuarial science applies mathematical models to predict the likelihood of returns on investment.
The Concept of Leverage and Time Management
Leverage refers to using resources—often time or money—to achieve greater outcomes. The most common form of leverage is time investment. One of the biggest challenges people face is making long-term decisions while under stress. An analogy I often use is this: if someone were to attack you, your immediate focus would be survival. Similarly, if you feel hopeless about the future, you are more likely to prioritize short-term gains over long-term investments. Conversely, optimism fosters long-term planning and investment in education, skill development, and financial stability.
Young people generally have more time to recover from mistakes, allowing them to take on more risks. As we age, the ability to recover from financial, health, or relational setbacks diminishes. Mistakes become costlier, but they remain an inevitable part of life.
Recognizing Our Inherent Debt to Others
No one starts life with financial resources or skills. We require investment—whether from parents, teachers, or mentors—to develop into capable adults. Acknowledging this moral and ethical debt to society is crucial. Some believe they owe nothing to others, but I align with Jim Dahle's philosophy: focusing on contributing to others creates value. A fundamental guiding principle should be striving to maximize one's value to society.
Achieving Financial Independence
Operating from a position of strength is ideal. The sooner you reach financial independence, the easier it becomes to build wealth and contribute to others. Financial debt can feel restrictive, as it limits personal freedom and decision-making.
The Game of Society and Financial Obligations
In the United States, societal rules function like a game. While you can disagree with these rules, breaking them carries consequences. The quicker you understand and navigate these rules, the more successful you are likely to be. Just as financial debts must be repaid, social and ethical obligations also carry expectations and consequences.
The Psychological Burden of Debt
Debt often leads to temptation. Most people dislike being indebted, and this discomfort can drive unethical decision-making. Financial freedom enables better choices, so minimizing unnecessary debt is a strategic move toward stability.
Debt Beyond Finances: Health, Relationships, and Well-Being
Debt extends beyond money. Health debt arises from neglecting physical well-being—whether through poor nutrition, lack of exercise, or chronic stress. If ignored for too long, recovering from health debt becomes increasingly difficult.
Other forms of debt include relational, spiritual, and nutritional deficits. I strongly encourage addressing all debts as soon as possible. Some advocate for prioritizing high-interest financial debts first, but the same logic applies to life. Spiritual, relational, or financial obligations may need to be resolved before other aspects.
The Cost of Neglect and Minimum Effective Dose
Many people sacrifice their health to improve their financial standing, but eventually, the debt must be repaid. If you neglect relationships for career success, relational debt may become irreparable. Some debts are impossible to fully repay, leading to lasting consequences. This is where the minimum effective dose principle applies—ensuring that you at least meet the minimum requirements across all areas of life to prevent significant setbacks. Ignoring one area completely can cause exponential problems over time.
Dan John wisely stated, "The easiest way to lose weight is to not get fat in the first place." The same principle applies to debt—avoid accumulating obligations beyond your means. Whether financial, relational, or health-related, excessive debt creates long-term burdens.
Strategies for Avoiding Unnecessary Debt
From a relational standpoint, dishonesty and unethical behavior create relational debt. Avoiding these behaviors helps maintain strong relationships. Financially, limiting unnecessary debt—especially for non-essential expenses—is crucial. Taking out loans to gamble, for example, is a risky financial move. In terms of health, chronic sleep deprivation or relying on unhealthy food for convenience will inevitably lead to health debt.
Personal Reflection: Managing My Own Debts
Like everyone, I have accumulated various forms of debt. I have made mistakes that resulted in relational debt and compromised sleep while building my business, leading to significant health debt. Balancing financial, relational, and health obligations is challenging and requires practice. Making sound decisions in each of these areas takes work, education, and discipline. By reading this article, you are already taking steps toward learning the behaviors that lead to a healthier, more balanced life.
Embracing Life’s Trade-Offs
Life is about trade-offs. Throughout your journey, you will accumulate different kinds of debt. Every decision carries an opportunity cost. Understanding that different seasons of life demand different priorities—whether financial, health-related, or relational—will help you maintain balance. Establishing a minimum effective dose across all areas ensures that no crucial aspect of life is entirely neglected. As circumstances change, adapt and reallocate efforts to maintain equilibrium across all facets of life.
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