Good Debt vs Bad Debt

Living life creates debt. Owning your own home, cars, dining out, and generally enjoying life, all cost money – money that is typically borrowed from a financial institution.

While debt is an essential part of everyday life, it can also wear out its welcome, and wear down your desire to dream for a better tomorrow. One of the reasons why so many Australians are restricted in their ability to achieve their financial goals is because they are simply ‘drowning’ in debt.

When you are deep in debt, you restrict your ability to build wealth before you’ve even had the chance to start.

That’s why you need an effective debt elimination strategy, a customised plan of action, and a clear understanding of the difference between ‘good’ and ‘bad’ debt.

A qualified mortgage broker can assist you in setting up strategies to maximise your good debt whilst repaying your bad debt faster. And overall getting to zero debt faster!

The difference between these two types of debt can be distinguished as follows:

Bad Debt

• Is used to make lifestyle acquisitions
• Does not generate an income stream
• Interest cannot be claimed as a tax deduction
• The interest and the debt needs to be repaid from personal ‘after-tax’ income
• Must be eliminated as quickly as possible.

Good Debt

  • Is used to acquire investments
  • Generates an income and appreciates in value
  • Interest is tax deductible
  • Income generated from investments is used to pay off the debt

Since the debt is largely self- funding, there isn’t the same urgency to pay it off. A loan used to secure a residential investment property is an example of smart debt. Financial independence is within your reach.

Financial independence is the result of building wealth and this requires discipline, the discipline to consider every dollar you spend and every dollar you save, because wealth (unless it’s handed to you) takes time and commitment to accumulate.