There is a massive difference between good debt and bad debt. Good debt is typically tax deductible debt that is used to acquire an asset that will appreciate in value (in a dollar sense) along with providing you with some sort of passive income. Assets you can typically get good debt on are shares, managed funds and property to name a few however, debt that is used to acquire discretionary things or “experiences” that may appreciate in value in your mind only but not in your bank balance is known as bad debt. These purchases typically do not retain their dollar values nor do they provide an income – they in fact take away from your cash flows and are a drain to your finances. Bad debt is usually associated with assets that depreciate in value over time. A good example are cars. Over time the value of the car depreciates however you are still paying the loan value of the car plus interest which in the end costs more than the car itself making this a bad debt.
Being able to tell the two apart should be quite simple and a good rule of thumb to go by is to minimise or get rid of all bad debts and maximise your good debt up to a stage where your cash flow can comfortably handle the repayments. The “comfortably handle” part is the tough one to get to because of the ever-changing environment. Balancing this part of the equation needs adaptability and investors need to be cautious of the worst-case scenarios accompanying with the underlying assets they took debt out on.
If you require help with understanding what’s best for you, the team at Superannuation Advice Australia can help. Contact us today!