Concept
Debt as emergency
Debt as emergency is JL Collins's rule that consumer debt is not a normal condition of adult life, however normal it has been made to look, but an emergency to be cleared before almost anything else, because its interest rate exceeds any return you could reasonably earn.
The arithmetic is the argument. A credit card balance at the rates common in Turkey grows faster than any investment an ordinary person can make, so every lira invested while carrying that balance is a lira lent at a low rate while borrowing at a high one. Paying the card is therefore the best guaranteed return available, and it is not close. Collins's word, emergency, is chosen against a culture in which instalments, overdrafts and minimum payments are presented as ordinary tools rather than as a machine designed to keep you paying. The minimum payment in particular is calibrated so that a balance lasts years. The rule has one boundary: a mortgage at a sensible rate on a home you can afford is a different animal, and the book treats it separately. Everything at consumer rates is the emergency, and the response is a written payoff plan run until the last balance is zero.
A real-life example
A young couple in Izmir are proud of the fund they add to every month, and carry a card balance they do not look at. When they compare the fund's likely return with the card's rate, the fund is losing them money every month it exists alongside the debt. They pause the investment order, point the whole amount at the card, and restart the order the month the balance is gone.
How to use it
- 1Compare the interest rate on each debt with the return you expect from investing; anything higher is the emergency.
- 2Pause investing, except any employer match, until consumer debt is cleared.
- 3Treat the minimum payment as a trap, not a plan; always pay a fixed amount above it.