Good vs Bad Debt

Apparently, among richer nations, Aussies households are among the most in debt.

Research from LF Economics, using official data, shows that Australian household debt has risen to 123% of the nation’s economic output, pushing both Denmark and Switzerland into second and third place respectively.  According to the Reserve Bank, household debt-to-income ratio reached a record 186% in 2015.

The housing boom is most often to blame forcing many buyers into large mortgages.  But don’t stress just yet, it’s not all bad news.

Debt isn’t always a bad thing.  Chances are by now you’ve heard of ‘good’ and ‘bad’ debt.

Good debt is usually used to produce an income and create wealth, whereas bad debt reduces our worth.

Utilising debt to purchase an investment property or share portfolio is usually seen as ‘good debt.’  Property value are expected to rise of the long term, and you receive an income in the form of rent.  Shares are also expected to go up and dividends are often received along the way.  Interest expenses are usually tax deductible and can often be claimed against income.

But don’t forget, investments and markets go up and down!  Seek appropriate advice and consider your circumstances.

Bad debt is borrowed to buy goods that depreciate in value, don’t produce an income and usually aren’t tax deductible.  The new car, jet ski, motorbike, caravan or loans for holidays are all included.

If things are getting out of hand for you and it’s time to start getting on top of your finances again, star first with your non-deductible debt and the one with the highest interest rate.  It may feel good to lose the smallest credit card first, but you’re better off not paying the additional interest the other one is incurring.

Most people set goals for the new year that include getting on top of their finances in some way.  I’d suggest you pick just one goal that you’re committed to and stick to it.  Pay off that one annoying credit card in the coming 12 months, lose that personal loan or consolidate those super funds.  Whatever is your biggest bug bear, I hope you get through it in 2017.

Amanda is the Adviser Director of Wealth Planning Partners. She is passionate about assisting her clients with The WPP Way, helping them Secure, Build and Succeed financially. She is Gold Coast based, but loves travelling domestically and internationally.

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