Does Good Debt vs Bad Debt really matter?

Debt is a normal part of life for many of us, and it comes in a variety of forms but what do we mean by good debt vs bad debt? By definition, debt is quite a simple concept – a sum of money that is owed. Yet debt varies from one individual to the next, based on a variety of factors such as financial circumstances, lifestyle, family structure and personal choices. As not all debt is created equal, I’m going to break it down further and explore the concepts of good debt and bad debt.

Good Debt

A good debt is a debt that you are in fact better off with, rather than without. You might be wondering how a debt can possibly make you better off, so let me explain.
Good debts are those that help you generate an income and/or increase your net worth. A great example is property debt. As much as a large mortgage may be a daunting concept, it is classed as a good debt. Why? Although you are being charged interest the loan, the property you have bought is an appreciating asset which means it will increase in value over time.
You may also be able to use good debt to reduce your taxable income through investment loans. If you are looking into investment properties, make sure that you seek advice specific to your situation by talking to an accountant and/or financial planner. Remember, the property market can be volatile so sound advice is essential.
Another example of a good debt is a university debt (HECS debt). A university debt allows you to gain skills and knowledge, which can increase your worth and value as an employee or business owner. Upon obtaining a degree, your earning capacity is likely to increase with more time and knowledge up your sleeve.

Bad Debt

A bad debt is debt for items that won’t go up in value – depreciating assets. Bad debts won’t help you generate an income, so using your credit card for that new Gucci handbag is not a good debt. It also won’t increase your net worth. Think about cars, too. They lose their value, and you’re unlikely to sell it for as much as you paid for it. The same goes for that boat you bought for family weekends, and the wedding you borrowed money for. Now that’s not to say don’t borrow for these items but, where and when you can, it’s always best to pay cash and save on interest charges.

If you’re looking to make any investments, purchase property or simply re-evaluate your finances, please consider what would be the best option for you and your circumstances. We offer a no obligation, free financial health check, where we look at your individual circumstances concerning good debt vs bad debt. What have you got to lose? Simply enquire now and one of our staff will be in contact to book your free appointment.
Until next time… Stay Savvy!