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About Debt

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About Debt - good and bad!

Debt is simply an amount of money you owe someone else for something you’ve already purchased – it could be a house, car, items purchased by credit card, personal holiday or something for your business. Any loans you are still paying off – pay day loans, house mortgage, etc - are debts.

Unfortunately, throughout the western world levels of personal debt are at record highs – largely driven by the power of consumerism, the use of credit cards and more easily attainable loans through sometimes ‘predatory’ lenders.

So reducing these debts may be high on your list of priorities if you’re one of these people.

Don’t get me wrong – debt is not a bad thing, but the ‘type’ and ‘level’ of debt you’re in might be. The important thing is to understand your debts and have a strategy for paying off them off.

But don’t fear debt – understand it, and get in control of it, rather than letting it control you.

But what is good and bad debt?

The concept of investing is that to make money, you need to spend money.

Many people actually borrow money [and therefore go into debt] to put into investments such as shares and even managed funds. This is “good debt” because it is off-set by your return on investment – provided of course, you picked a wise investment!

Other examples of ”good debt “ are house loans, because your house is also a valuable asset in your wealth portfolio and car loans – although cars depreciate in value, they are usually essential for getting to work, etc. and therefore considered a part of acquiring wealth.

Student loans, debt incurred in the course of developing your career and business loans are all considered to be good debt. In fact, you may even be able to claim the interest component of business loan repayments as a tax deduction – but check this with your tax accountant first, as rules differ in different countries.

Hence, good debts can be described as debts that help you build wealth.

Of course, good debts are only ‘good’ if they are for the right investment, the right house and the right car for your needs and repayment ability. Many people are still paying off loans for failed investments.
 
Bad debts are loans or credit with no tangible ‘asset’ or for an asset of little value – for example, taking out a personal loan for a holiday is considered bad debt as you have not accumulated any wealth from it.

And taking out a loan for an 80 inch plasma TV is also bad debt as it depreciates in value (like a car) but unlike a car, doesn’t help you build wealth.

Debt that arises from the over-use of credit cards is also bad debt as this debt typically arises from lots of small purchases with no real value.

Hence, bad debts are those that don’t help you build wealth.

What debts do YOU have? How many of these are good and how many are bad?
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We are not certified financial planners or advisors. The information in this website is general information only. Always consult a licensed financial planner before making any finance or investment decision.


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