Debt is bad – I don’t want to borrow!
That’s what I heard someone say at friends BBQ last weekend.
The conversation had turned to real estate and how hot the property markets are at present (as it usually does) and one of the group standing around said: “I’ve almost paid off my house – I hate the thought on taking on more debt.”
So the question begs, is all debt bad?
Fact is you can’t work or save your way to wealth.
If your money isn’t working for you when you’re asleep you’ll never become rich.
And for your money to work for you, you must leverage it – you must take on debt.
So…if you’re not in debt, chances are you’ll never become wealthy or achieve true financial freedom.
Of course not all debt is good.
As I see it there are 3 types of debt:
1. Necessary debt
This is the debt you need to take out against your home.
While the interest is not tax deductible, the debt is necessary to provide a roof over your head and the value of your home should increase over time.
2. Good debt
Good debt is ‘efficient’ as it helps you buy appreciating assets such as investment properties and the interest is tax deductible.
Even better the rental income from the investment property helps you repay the debt, and if you claim depreciation and negative gearing, the tax man and your tenant share in your mortgage repayments with you.
3. Bad debt
Now this is what I consider ‘inefficient’ debt and can keep you poor forever.
Bad debt buys you assets that decrease in value over time like “toys”, fancy cars, gadgets etc.
Worse still the interest you pay the bank is not tax deductible and repayment of the debt is from your own resources
Now don’t get me wrong…
I like my toys as much as the next person, and now I can afford them because I’ve built a substantial asset base of income producing properties.
I did this by spending less than I earned and investing the difference.
Then I saved up a deposit and took on good debt to buy my first investment property.
Then I took on more good debt to buy the next property and the next one, until I could afford the luxury of taking on bad debt to reward myself.