Good debt can fuel personal wealth creation. It is when you borrow to buy an appreciating asset such as investment property real estate or shares. Not only is the asset you buy likely to increase in value over time, but the interest you pay on the loan is tax deductible.
So, depending on your income and your tax bracket, you could end up borrowing for your investment virtually tax-free. Your local small business accountant or chartered accountant can identify this for you.
Bad debt is borrowing simply to spend, either on day-to-day things like clothes, or on things that lose value from the day you buy them, like cars and washing machines. This is the typical credit card, car or home appliance finance debt, and it is the worst kind of borrowing.
Your own home debt has characteristics of both bad and good debt, so it falls somewhere in the middle. Just like an investment property, the value of your residential home should increase over the long term, so that is good. However, you cannot claim a tax deduction on the interest you pay on your residential home loan, like you can with an investment property.
This is a great pity, because over the lifetime of the mortgage, you will probably pay more than twice the value of the original loan in interest. That is why you should pay your mortgage off as soon as possible. You need to reduce your non-tax deductible total interest bill as much as much as you can on your residential home loan.
Identify your debt, categorise them, then prioritise them
There is no doubt that one can argue the difference between Good and Bad debt, as most people certainly can’t always pay cash for every purchase.
The age old saying of ‘Everything in Moderation’ applies in the case (your local small business accountants may disagree!) of debt and when to acquire them, but it certainly helps to be able to identify the types.
Contact one of the many chartered accountants in Brisbane or contact Funder & Associates to help manage your debts.