How To Make Sure You’re Using “Good Debt” To Grow Your Wealth Faster
Debt often gets a bad rap, but not all debt is created equal. When used strategically, debt can be a powerful tool to accelerate your wealth-building journey.
The key is understanding the difference between “good debt” and “bad debt.”
The 3 Boxes To Tick For “Good Debt”
To ensure you’re leveraging debt the right way, here are three boxes you should aim to tick:
- USE DEBT TO BUY ASSETS THAT APPRECIATE IN VALUE
When you borrow money to invest in assets that have the potential for capital growth, such as real estate or shares, you’re putting your debt to work for you. As the value of your assets grows, so does your wealth.
- CHOOSE ASSETS THAT GENERATE PASSIVE INCOME
The assets you purchase with debt should also produce a steady stream of passive income. This could be rental income from an investment property or dividends from shares. The passive income can help cover the costs of servicing the debt while your assets continue to grow in value.
- MAKE SURE THE COSTS ASSOCIATED WITH THE DEBT ARE TAX-DEDUCTIBLE
When the first two boxes are ticked, the interest and fees you pay on the debt are generally tax-deductible. This can significantly reduce the overall cost of the debt and make it an even more attractive option for growing your wealth.
Examples Of “Good Debt” In Action
- Using a bank loan to purchase an investment property
- Securing financing to buy a profitable business
- Drawing on your home equity to invest in a diversified share portfolio
Watch Out For “Bad Debt”
On the flip side, bad debt is typically used for consumption, such as credit card balances or car loans. These types of debt are used to purchase assets that depreciate in value and don’t generate any income. While there may be times when taking on this kind of debt is necessary, it’s best to avoid it whenever possible.
The Grey Area: Student Loans and Home Loans
There are a couple of other types of debt that fall into a grey area. Student loans, for example, could be considered good debt if they help you launch a successful career and increase your earning potential. And while a home loan may not be “good debt” in the traditional sense, there are ways to convert it into a wealth-building tool – but that’s a topic for another day.
The Bottom Line
When used wisely, debt can be a valuable ally in your quest for financial freedom. By focusing on good debt and avoiding bad debt whenever possible, you’ll be well on your way to building lasting wealth.
Stay tuned for more tips and strategies to help you make the most of your money!
How to get started?
Click here to book a free phone chat to talk about your specific situation.
Speak to a mortgage broker (we know a great one).
Follow us on our social channels for more content and ideas.
Cheering you on!
Certified Financial Planner®, Director
Download our Money Flow Playbook
Click here to download a copy of our Money Flow Playbook.
Download our Investment Playbook
Click here to download a copy of our Investment Playbook.
Book a free phone chat
Click here to book a free phone chat to talk about your specific situation.
Financial Advisor Geelong.
Important:
This is not tax advice. Your personal objectives, needs or financial situation have not been considered when preparing this information.
The information contained in this update has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs.
You should seek advice before making any decision regarding any information, strategies or products mentioned to consider whether that is appropriate to your own objectives, financial situation and needs.
Current as of 15 May 2024.