I was at my local cafe earlier this week and I heard a comment from the table close to me… “I’ll just keep renting as I hate the thought on taking on debt.” I don’t usually eavesdrop (unless it’s about property or money) but this caught my attention for obvious reasons.
So the question begs, is all debt bad?
If you’re not in debt, chances are you’ll never become wealthy or achieve true financial freedom. So long as you understand the different types of debt, you can achieve true financial freedom in a predictable way.
Good debt is what I call ‘efficient’ debt. It can help you buy investment assets which grow in value (e.g. investment property), the interest cost is tax deductible, the rental income from the investment asset helps you to repay the debt, it’s easier to service the debt, and repayment of the debt is shared between you, the tax man, and your tenant.
Bad debt on the other hand is ‘inefficient’ debt. This type of debt will usually send you broke or will forever keep you poor. Bad debt buys you toys, it is used to purchase non-income producing assets, the interest you pay the bank is not tax deductible, and repayment of the debt is from your own resources
Of course we all want certain lifestyle toys to enjoy, however if you continue to only buy toys and no investments, or take on large lifestyle commitments by borrowing money (credit cards, personal loans, etc.), then chances are you will never achieve the true financial freedom that you deserve or want.
Personal advice (and the right advice) is paramount to help you get ahead financially and to ensure you are not held hostage to your debts.
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