Key Takeaways
- Buffett’s guiding rule is never risk what you truly need for something you don’t need.
- High interest consumer debt, especially credit card debt, is a near-certain savings killer and should be paid off before investing.
Warren Buffett thinks your biggest financial drag isn’t saving too little. Rather, it’s credit card debt quietly compounding at 18% or more.
“The idea of trying to borrow money at 18% [or more] and thinking you’re going to get ahead in life—it isn’t going to work,” he said when asked about high-interest debt in 2001.
According to Buffett, paying off high-interest debt will beat almost any investment idea he could offer you. Given that the average credit card interest rate in the U.S. is 21%, a staggering 45% increase since 2020, Buffett’s advice on debt avoidance can help you stay ahead.
The Debt Buffett Calls ‘Insane’
Buffett isn’t against all borrowing—he’s against debt that risks essentials for non-essentials. He’s called it “insane” to risk what you have and need for something you don’t really need, no matter how good the odds look. If a decision threatens your security for a lifestyle upgrade or a slightly better return, skip it.
That’s why he’s especially tough on credit card debt. When asked about cards charging around 18% to 20% interest, he said the first thing he’d do with any money is pay them off. He warned that owing $10,000 at 18% could put you “in trouble probably the rest of your life.”
Four Moves to Put Buffett’s Rule to Work
Here’s how you can use Buffett’s rule as a daily filter for every borrowing decision.
Guaranteed Double-Digit Return
First, list every debt you have, including the balance, interest rate, and minimum payment. Then rank them by their interest rate, with the highest first. When you have extra money to put towards your debt, pay the debt with the highest interest first. Then keep paying down your debts in order, from the highest interest rate to the least. (This is called the debt avalanche strategy—an alternative is the debt snowball strategy.) Every extra dollar you put toward those balances earns a risk-free double-digit return that most investments can’t match.
The ‘Don’t Need It’ Test
As you attack high-interest balances, stop creating new ones by avoiding loans for cars, trips, gadgets, or upgrades. Apply Buffett’s “don’t risk what you have and need for what you don’t have and don’t need” test before borrowing.
Before you buy, ask yourself whether this purchase creates lasting value. Or is this just about short-term comfort? It’s all about making sure your current behavior is driving you towards your long-term goals. Will this purchase help you get there, or will it delay your progress?
The Cash Buffer That Keeps You Off the Cards
Aim to build an emergency fund—that is, three to twelve months of essential expenses in liquid savings—so setbacks don’t push you onto high-interest cards. Keep your housing payment, car loan, and subscriptions low enough that your budget can flex during income drops and downturns. Overstretching on your mortgage, rent, or car is the household version of a leveraged bet Buffett would decline.
Borrow To Build, Not To Stretch
Once expensive debt is gone, consider only borrowing to build long-term value. Focus on fixed-rate mortgages for reasonably priced homes you plan to keep, or carefully chosen education and business loans that reliably boost earning power.
It’s important to keep terms conservative so payments remain affordable even in downturns, avoiding borrowing to speculate or stretch for lifestyle upgrades. Borrow sparingly—only when returns are highly likely and the risk to what you already have stays low.
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The Bottom Line
Buffett’s brilliance isn’t in finding the flashiest opportunities—it’s refusing bets that could cost him what he can’t afford to lose. High-interest consumer debt, especially credit card debt, is that kind of bet because it compounds relentlessly against you and shrinks your options. Using his debt-avoidance rule in your own life means aggressively paying down expensive balances, resisting lifestyle debt, protecting your emergency fund, and only borrowing when the upside is durable and the downside is survivable.