Debt - Good or Bad

Let me help you see how using "other peoples money" can make a difference in your life. If you are using credit to purchase an asset that you are able to get an income off – like an investment property. This is considered good debt. The rent coming in from the tenant may cover the interest payments on the loan along with the other expenses.

Over a period of time the property could increase in value. Recently we have seen property prices increase substantially. This makes a difference when the property is sold, as the mortgage/loan is a smaller percentage of the selling price. The seller could find there is more equity left than when they originally purchased the property.

Good debt can assist you to leverage into a higher priced investment. This can lead to better returns over all, and help manage a savings gap towards your retirement. To embark on a leveraged programme it is important to have your money management strategies in place. This ensures you do not over extend your credit and cause payment difficulties further down the track. It is prudent to evaluate your debt to equity ratio as if your were in business.

Leveraging or gearing is using credit to invest for a greater gain. This also means that there is a higher level of risk. Leverage can be utilised to make a good investment better. However it can also make a bad investment worse. You can gear into any type of investment, shares managed funds, or forestry. Most commonly investors leverage into property. If you find you can’t meet loan repayments and have to sell you could lose part or all of your investment. There are tax implications, depending on each individuals circumstances which need to be taken into consideration

Bad Debt

The principles of bad debt are where we are purchasing to consume. This can be on a credit card, store card purchases or through a car loan, or personal loans. If you need to borrow to purchase, the cost of the purchase will be a lot higher than the original retail price. If you were to ask yourself if you wanted this purchase including all the interest charges you might think differently.

Take a credit card where it is easy to go to the store and purchase what ever you want on the credit card. You feel you can have what you want when you want it, however some day it must be paid for.

To choose to buy a product for a $100-00 and put it on the credit card. If you do not pay the full amount off by the due date, credit interest will be added to the cost on the card. This makes the price of your purchase a lot more expensive than purchasing for cash. When we are purchasing for everyday lifestyle things on our credit card to use or consume, with out paying them off in full – this is bad debt.

We are living beyond our means, if this is applicable to you click on the link below, and take a look at changing your current circumstances. Using my credit card

If you currently have a mortgage, a Mortgage Broker or Budget adviser can assist you in reviewing your circumstances regarding debt restructuring to get the best options for your circumstances.