Good vs bad debt

Many Australians will learn that debt can be bad only after they are in the hole, owing thousands to a credit card company. Any yet, not all debt is bad either. Used intelligently, debt can be of tremendous assistance in building wealth.

One of the basics of smart money management is being able to differentiate the difference between good and bad debt. While the difference often seems logical, it is a logic that apparently is missed by many Australians.

Good Debt

When you borrow money to buy something that will increase in value or increase your value then it can be considered good debt. Borrowing to buy a house is generally considered good debt, as a home is considered a quality investment that will hold its value and free you from paying monthly rent. Borrowing to put yourself through University can also be considered good debt, as this money should be repaid through a higher future salary.

Something else to keep in mind is that the Australian Government often offers tax incentives for good debt investments.

Bad Debt

Borrowing money to purchase disposable items and durable goods that lose their value, like clothes or TVs, can be considered bad debt. If you used a high-interest credit card to purchase a holiday, for example, and don’t pay the amount back in full you will be charged monthly interest on that debt. In this scenario, while the holiday has been taken and enjoyed, the amount you paid for it continues to increase.

Eliminating bad debt should be a priority when aiming to achieve financial independence.

Debt Education

Debt is a complex subject and many young Australians will find themselves owing money before they even have a job. Not handled correctly, bad debt can spiral out of control and negatively impact on a person’s life for a number of years, if not longer. On the other hand, understanding how to use good debt can help to ensure long term financial security.

Once you have got past the basics of good vs bad debt there are a range of more complicated debt strategies you may like to study. Debt recycling, debt transformation and reducing taxable income with good debt are just some examples of strategies you may like to explore.