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Good Debt and Bad Debt: Is there such a thing as Good Debt?

May 31, 2013 6:44 pm
posted by James Parnwell

Good debt and bad debtMany people think debt is the result of poor money management and choices. But what about debts that result in income potential or wealth such as a student loan? or a mortgage?

These are healthy debts, or ‘good debts’, and these are debts that you actually want to get yourself into in order to become wealthy in the future!

The average cost of study has increased more than 50% in the last six years, yet student enrolments are increasing too. This is because, more and more people are using HECS as an avenue to study, resulting in a better or higher paying job after graduating.

Debt can play a valuable role in moving you into a better financial position in the future!

A HECS debt is not the only example of a ‘good debt’. If done the right way, investing in property will lead to wealth in the future.

Despite the Global Financial Crisis, houses in the Western Suburbs of Sydney have continued to increase in value by just over 6% annually in the last 10 years. Adding 6% equity to the value of your mortgage each year is definitely a good debt so looking at an investment property, and maybe your first, or second mortgage could be a great idea.

But where do the lines start to blur?

Good Debt and Bad Debt: How do I know if I am getting into a good debt or a bad debt?

Always remember, when you are looking at borrowing money that you do not need to borrow enough to live an expensive and extravagant lifestyle. The equity in your home is the only asset, so using the money to buy wants instead of needs can quickly turn the ‘good debt’ that is your mortgage into ‘bad debt.’

A great way to differentiate between a good debt and a bad debt is to look at the pattern of your mortgage repayments.

  • Is your mortgage at a price you can manage to pay?
  • Are you able to live a comfortable lifestyle and provide for your and your family’s needs without dipping into the equity of your home or lowering your repayments?
  • Could you cull some luxuries to help pay the mortgage faster?

When looking to borrow money, be mindful that it may not always be wise to borrow all the money that is available to you.

Even if the debt is considered a good debt, you should work to pay off your debts as quickly as possible.

This will allow you to begin to build wealth. It can also help you pursue your dreams, because you will not be as dependent on your paycheck each month.

There are many reasons to get out of debt. If you are serious about getting out of debt, you will need to set up a budget and great a debt payment plan that allows you to apply additional money to your loans each month.

You can pay off your debt more quickly than you think you apply the money correctly.

It may mean taking on an additional job for a short period of time or cutting back your lifestyle, but the sacrifices will be worth the effort.

Article by James Parnwell & Jordan Cox

If you would like some further information on anything related to Investment Property or Investment Finance please contact us

One of our team of experienced Investment Property coaches or Investment Finance Mortgage Brokers will be happy to reply to you with some helpful adviceā€¦

Please let me know if you have any questions.

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