Debt.
Will It Lead To Rags … Or Riches?
Do you remember the kids cartoons where the main character was being tempted to be bad by a Devil one shoulder, whispering in his ear?
On their other shoulder of course was an Angel, telling them to be good.
We have the same duelling combination, fighting for our attention.
On one shoulder is the Angel of Good Debt.
And on the other is the Devil of Bad Debt.
Both fighting for your attention.
Good debt is money you borrow for something which is worth MORE over time.
And bad debt is money you borrow for something which is worth LESS over time.
An investment property is a great example of good debt.
When you borrow money to purchase an investment property, it goes up in value, making you wealthier.
And at the same time it’s paying you rental income which, over time will grow much larger than the interest you’re paying.
That’s a good outcome, and it’s why we call it ‘good’ debt.
Here’s A Classic Example Of Bad Debt
So what does bad debt look like?
Well, let’s say you want to go on a holiday.
The Devil of Bad Debt will be whispering in your ear to “Go on, borrow the money. Go 5 star. You deserve it. And take lots of spending money.”
You’ll have a great time, I won’t deny it.
But financially, once your holiday’s over and you’re back to the daily grind, you’ll still have the loan sitting there demanding to be paid every month.
Your holiday + the interest is going to ‘own you’ for a while.
And you have nothing in terms of money producing assets to show for it.
That’s BAD debt.
Sure, there are times you need to borrow money for non-income and wealth producing assets. But the key is to do it sparingly.
I’m not saying don’t go on a holiday. Just save up for it instead of borrowing the money.
It’ll cost you less overall because you won’t pay interest if you don’t borrow the money.
And don’t use debt for ‘fun’ things like a brand new TV, expensive furniture or holidays.
With bad debt, you’ll be paying the money back, and you won’t be getting any money coming back in return.
Plus the TV and furniture will be worth less with every year which goes by.
Another problem with bad debt is the banks don’t like it.
And the more bad debt you have, the harder it is to get a loan because you’re already paying back too much on other things.
Other Examples Of Good Debt
Now, you might think the only good debt is an investment.
Property, shares, managed funds and so on.
But there are other good debts too.
HECS/HELP is another good one because it pays for your education, and that can get you a better career and more money.
That can be a great idea, and it can pay itself off many times over.
Another good debt could be money you borrow to start a business.
Again, you’re using debt to turn it into more money.
What About A Car Loan. Is That Good Debt Or Bad Debt?
One prickly one is borrowing money for a car.
However, when you think about it, it’s pretty simple to work out.
A car loan is expensive, once you add up all your interest.
And the car itself costs money to run, and it goes down in value every year.
That makes it bad debt.
But (I’m getting to it) you need it to get to work, so arguably it’s also good debt.
The trick with car loans is to save up as much as you can, so your loan is small.
And don’t overspend on a car.
If you can get to work in a reliable (but not extravagant) car and it costs you $10,000 then fine.
But if you spend $30,000 on the car, and you borrowed the money … $20,000 of that is bad debt.
It wasn’t necessary.
Here Are My 7 Tips To Use Debt So It Makes You Richer
Tip #1. Invest wisely. Make sure your investments appreciate and produce income.
Also make sure they’re low risk, otherwise your good debt can turn into bad debt.
Tip #2. Opportunity cost. There’s a limit to how much any of us can borrow. So choose wisely because if you borrow for something which underperforms, and you miss out on something which performs much better, you’ve missed an opportunity.
Tip #3. Review your loans and assets regularly to make sure they’re still making you money.
If something’s not making you money, fix it so it is or consider ditching it altogether and replacing it with something better.
Tip #4. Make extra repayments. By making extra repayments on your loans, you’ll pay them off sooner.
The best ones to start with are high interest loans like credit cards and store debt.
The last ones to repay are loans which give you a tax benefit, like deducting interest on an investment property loan.
Tip #5. Structure your debts properly. By consolidating debt or using offset accounts, you can reduce your interest bill and pay off your bad debt faster.
Tip #6. Stop bad debt from coming back. Don’t use credit cards, and if you do, pay them off as fast as you can. Then cancel them.
Same with store credit and any other credit facility which tempts you to keep racking up more and more bad debt.
Surprisingly, even if you’ve paid off a credit card and don’t owe anything on it, the banks will still assess any future loans as if you had it maxed out.
That’s because the potential to use it all up is still there.
Not a lot of people know this, but it’s why your first step after paying off a credit card is to cancel it.
Tip #7. Get professional help. You might think this is all straight forward.
And it is. But there are some advanced strategies you can use to clear up your bad debts faster, as well using good debt like investing in real estate
I hope this all made sense.
Debt can be both good and bad.
In the right hands it can make your richer.
But if you give in to the temptation to use it for the wrong reasons, it can destroy you.
Ready To Put Debt To Work For You?
Using debt correctly can make you wealthy and increase your income.
But you have to know what you’re doing.
Plenty of people try to invest in real estate by going solo.
And they fall into the many traps which are lying out there waiting for you.
This is why I’d like to offer you a free session with one of our consultants.
They’ll show you how to use good debt to create wealth, and how to clean up your bad debt at the same time.
This is because there’s a growing gap between the haves and the have nots.
And how you use debt is what decides which side of the gap you’re on.
Fill out the form below to find out how you can use good debt to create wealth.