What is good debt?

Although it might not seem obvious, the key to a stronger financial future may be borrowing money.

Disclaimer: The information contained in this article is of a general nature only and should not be taken as financial or legal advice on any of the topics discussed. Always consult a financial adviser before making any investment decisions.

If you’re adding to your savings it will mean your bank accounts are never diminished with debit interest - debt serves a purpose as we progress through our lives and careers.

At some stage in their lives, most Australians will have the dream of buying their own home one day. This will invariably come hand-in-hand with a mortgage. It is not enough, in today’s market, simply to ensure that you are able to demonstrate a regular savings commitment to reach a required deposit.

The key to securing the best deal for your financial situation is a good credit history. This is built over time and will reflect your financial behaviour, such as meeting loan and bill payments.

So, what is good debt? Before you whip out the credit card, it is important to first think about your needs versus your wants.

What is good debt?

Good debt is a borrowing which will help you to access or leverage financial value or longer-term income. An example would be the student loan which finances your further education. This will present longer term opportunities, both in your professional life and for your income.

Given that student loan repayments are directed by the Australian Tax Office; they are not reflected in your credit history. There are however other “good debt” options that may be reflected in your history, such as borrowing for a vehicle or for investment.

What is bad debt?

You are going to need to make smart decisions about your debt if you wish to have the financial freedom to choose the life you want.

If you take on bad debt, it will diminish your financial position over time. Bad debt is rarely attached to an asset that appreciates in value over time.

Bad debt may include taking on debt to buy clothes, gadgets, entertainment, nights out and holidays. Before each purchase ask yourself how it will build your financial future. There is no reason for you to pop the purchase of a new outfit on your credit card, if you can’t afford to pay for the night out in cash.

Remember, it can be very easy for the interest payments to cut into your weekly budget. The automation of credit transactions through subscriptions, direct debits and memberships means it’s more important than ever before to keep track of your monthly purchases and the outstanding balance.

You should always think carefully before taking on any debt, to ensure that you are positioning yourself for financial success. This all begins with calculating a realistic budget you can stick with.

Creating a solid strategy to build wealth

You should only look to build wealth through borrowing money if your aim is to build up a credit rating and make purchases that will add value, such as assets.

Depending on your tax rates, you may be entitled to other benefits when you borrow for property and share market investment, which is known as gearing. If you calculate the overall implications of this strategy, you will also need to consider the possible tax deductions, interest rate, income risk, fees and charges and the flexibility of the investment should you need to exit.

ASIC nominates 5 steps towards financial security that you may want to take a look at. It begins by having a full picture of your finances. Before you enter into the lending market, it is important to remember that you will not only need to borrow within your means, but towards something which is going to add some value to your life. You need to make sure you are borrowing to succeed in ways which will meet all of your longer term needs.

Before you make the commitment, first ensure that you are seeking any professional advice when it comes to your finances and research your lending options. For example, you should look up the different fees and charges, penalties, terms and conditions and market interest rates.

Do you need to review your home loan? Contact Us.

Important note:

While every care has been taken in the preparation of this article, ADNA Financial Services makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Material contained in this news item is for general information only. It comes from a number of sources. Some of the content is provided by external writers. Any advice provided within the various articles is of a general nature only and should not be construed as providing advice on any of the topics discussed. Your needs and financial circumstances have not been taken into account.