Not all debt is created equal

 

Are you scared of debt, or opposed to it on principle? If so, you’re not alone. In my experience, most Australians prefer to avoid debt, and some will even save up for years to pay cash for big purchases. But this fear is often misguided, because not all debts are created equal.

So what’s the difference between a good debt and a bad debt? It all comes down to what you’re doing with the borrowed funds. If you’re using them to invest in assets that will grow in value, provide an income source, or both, it’s a good debt. If you’re using them to pay your expenses or purchase assets that depreciate quickly, it’s a bad debt. Here are a few examples:

Good debts

● Home loan for your primary residence

● Home loans for your investment property portfolio

● Investment loans to buy shares

● Investment loans to buy managed funds

● Student loans to improve your skill sets to obtain further income

Bad debts

● Credit cards

● Personal loans

● Car loans

● Vehicle lease plans

● Australian Taxation Office debts

It’s worth pointing out that bad debts aren’t always a bad financial decision. For example, taking out a loan to fund your higher education may lead to a higher-paying career and better long-term financial prospects. That might be a good decision for you, but it’s not a good debt, because it’s not linked to a tangible asset that will grow in value or could be sold to repay the loan.

In contrast, if you borrow money to buy property or shares, you’re buying a tangible asset with a market value. And instead of waiting until you’ve saved up enough cash, you can use a loan to perfectly time your entry into the market, buying when the price is low and starting to rise.

So don’t be afraid of debt. Use it wisely, the same way you’d use cash for investments, and it can open up a whole world of investment opportunity. To discuss this strategy or find out more strategies that meet your unique property situation, get in touch with us today to speak to one of our friendly property consultants. Let us do strategy while you pick the home of your dreams.

Disclaimer: The information contained in this article is for information purposes only and cannot be relied upon. You should seek professional advice tailored to your specific personal and financial circumstances.

 
Scott Miller