deleveraging where hopefully in the long term we have all learnt a lesson. (although I suspect we haven’t)
So I hear you saying that all debts are bad however look at thing objectively and I think most people will agree that it is difficult to go through life debt free.
What is good debt?
The generally consensus is that good debt is debt acquired to produce an appreciating asset and yes shares do appreciate in value in the longer term. Examples of appreciating assets commonly funded through debt are the family home, investment properties and shares. Sometimes debt incurred to purchase the family home is framed as bad debt as it isn’t tax deductible however my view is it’s technically a good debt but you need to take tax deductibility into consideration when electing which debt to pay down first.
What is bad debt?
Bad debt is used to purchase a depreciating asset such as a car or debt obtained to support lifestyle spending. Bad debt is those credit card purchases that you ‘had’ to make and that European vehicle that you had to have when a cheaper alternative would do the job.
What does this mean to me?
When taking on any debt consider the long term implications. Here are some common scenarios.
When buying the family home will I be able to make my repayments if I don’t get that bonus or if interest rates rise 2%? What will happen when we have a family and go down to one wage?
When buying shares or investment properties are they really a good investment? What happens if share prices fall, am I prepared to invest long term (minimum 10 years), what if I don’t get a tenant?
When buying that shiny new motor vehicle, do I really need all these extras, can I afford the repayments and what are the long term ramifications?
With genuine bad debt such as furniture, jewellery, racing bikes and clothes consider how bad you need it, should I save the money first, can I justify not putting the funds into the mortgage, and what are the long term ramifications?
I hope this article has got you thinking and will at least assist in making an informed decision when you are making that next impulse purchase or investment.
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