When we so much of think about debt, it fills us with dread. But the truth is, not all debt is bad. In fact, if you’ve got the long-term in mind, debt can in fact be pretty good.
When you finally understand the difference between good and bad debt too, your knowledge of property investment will change for the better. Viewing all debt as bad isn’t the right move and if you’re doing this, you’re putting yourself at an immediate financial disadvantage.
In this piece, we’re going to walk you through the different types of debt, giving you a clear picture of what’s okay and what most definitely isn’t.
What Types of Debt Should I Know About?
There are three key debt categories you should be aware of – bad debt, standard debt, and good debt. Let’s take a look:
This is any borrowing you do for items that’ll ultimately depreciate in value. Any credit card debt is usually bad debt, as well as personal loans or car loans.
The worst thing about bad debt (aside from the fact you’ve got to pay it back) is that it doesn’t do anything for you, and it’s not tax deductible. This means you can’t claim the interest on it as a tax write-off.
This is used to purchase any items that’ll eventually increase in value, but the debt still isn’t tax deductible. Typically, your family home is the biggest example in your life of tolerable debt.
Whilst paying off a loan with non-deductible interest isn’t good for your wealth creation, your home can still increase in value. so, in the long-term, you’re more likely to make a financial gain than a financial loss. Plus, we all need a roof over our heads. That’s why standard debt is a tolerable financial commitment.
You guessed it – good debt is the good one. This is debt that you’ve used to acquire assets that’ll appreciate in value over time, and with this, your debt is 100% tax deductible. Typically, good debt reflects loans you’ll take out for an investment property, where you’re borrowing money to acquire an asset that’ll advance your personal wealth.
Conclusion: Understanding Debt is the Key to Financial Success
Although many of us aren’t comfortable with debt, you can hopefully now see why all debt isn’t bad. And by understanding this, you’re taking your first steps towards creating new wealth as a smart investor.