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Not all debt is created equal. There is 'good' and 'bad' debt. A sensible approach to debt can be a powerful tool in helping you get the things you want out of life.
There's no instant fix when it comes to reducing your debt. You need to go back to basics: increase your income or reduce your outgoings.
While most of us want to be debt free, the fact is, in some cases it makes good sense to have some debt— it can actually be a powerful tool for creating wealth. It comes down to categorising your debt as 'good' or 'bad'.
The main differences between good and bad debt are tax-effectiveness and return on investment.
The vast majority of credit, such as a personal loan or credit card, isn't tax deductible, which means it's 'bad' because you have to pay tax on your income before you make the repayments.
If you use debt to buy things that don't appreciate or at least hold their value, this is also 'bad' debt.
Any debt that works to make you more money than it costs you is classed as 'good' debt. Borrowing money to purchase growth assets that will continue to produce an income is known as 'gearing'. It has the potential to increase your net wealth over time so is considered 'good' debt.
However, your higher potential return comes with a higher risk.
Should the investment fail or fall in value, you'll not only lose your cash, you'll also have to pay back what you borrowed. So it's not a strategy for those less disciplined with their cash.
Home loans bridge the gap between good and bad debt. It's bad debt because a mortgage isn't tax deductible, but it's also good debt because we all need somewhere to live, and a home loan gives you ownership of a significant asset.
Turning bad into good
If you have a loan linked to an investment property, or if you moved to a larger property and kept your current home as an investment property, this can make your loan very tax effective.
Making additional mortgage repayments is a safe and sensible strategy because it represents a tax-free, risk-free return. You could also use the equity you've created in your home as security for tax-effective borrowing for investment to grow your wealth. That is, turning your 'bad' personal loan debt into 'good' wealth-generating debt.
Our financial advisers can work with you to create a financial plan that turns bad debt into good debt and helps create lasting wealth.