In a nutshell…
- Good debt is an asset which increases in value over time.
- Bad debt is an asset which declines over time.
The type of debt most of us are familiar with is the kind where you have to pay back money with interest for purchases that you’ve made.
It’s often in the news about the amount of debt Australians have. While this can be something that can make you worry, it’s important as an investor to understand that not all debt is bad! In fact, good debt can help you to grow your wealth.
What is good debt?
Good debt is when you borrow to invest and your investment produces an income. This therefore makes the interest you’re going to pay on the loan tax deductible. Good debt is also where the investment increases in value after you have invested, for example, when you invest in property or shares.
What is bad debt?
Bad debt happens when you borrow to invest but the asset depreciates in value. This means the interest on the loan is non-deductible because it is a non-income producing asset, such as a car.
Many of us cannot avoid some form of bad debt, but it is best to try and minimise it whenever possible. So how do you put your debt to work (once you’ve become comfortable with the idea of being in debt)?