Debt – Good, Bad or a bit of both?

Did you know that there are some kinds of debt that can actually work for you to build wealth and others that will essentially work against you and your financial goals?

Debt can be split into two clear categories – Good Debt and Bad Debt.

Knowing the difference can give you a clear picture of your current financial position and put you in control for future wealth.

Good debt is that which you can get a tax deduction and that has been used to buy assets that grow – think shares and property. This kind of debt works hard to generate income and increase your wealth.

Conversely, bad debt is that which you cannot claim a deduction for (such as your home loan) or that may have been used to purchase an asset that diminishes in value such as a car. Credit cards are another obvious bad debt which can accumulate quickly.

To get back in control of bad debt (and not have it control you), here are some tips to repay it quickly:

• Consolidate bad debt – if credit card debt is out of control, consider consolidating it. This strategy works only if you commit to paying off future credit card debt in full every month.

• Cut up or hide credit cards – drastic, yes, but out of sight is out of mind and it could make the difference between impulse shopping and sensible purchases.

• Increase repayment amounts – get out your statements, calculate your budget and make paying off bad debts a priority.

• Pay weekly or fortnightly rather than monthly – this will put a big dent in interest charges.

• Consider if debt recycling is appropriate to your circumstances – this is a relatively higher risk strategy where you may borrow money to invest against your current home loan.

• Get advice – have a trusted adviser to hold you accountable, keep you on track and look at the bigger picture of wealth for your future.

To discuss your financial future, contact us and have your complex financial matters translated so you can easily understand them and make informed choices.