Smart to be in debt?
It is possible to live completely debt-free - we’ve all heard of people who sell everything they have and trade it in for a camper van or make the choice to rent and save for retirement rather than tie themselves to a 30 year home-loan. Perhaps it’s fear that compels them to avoid debt or over-extend themselves financially. And in some cases it can seem like the prudent thing to do.
But is it smart?
The fact is that very few people have or earn enough money to pay outright for life’s most important purchases: a home, a car or an education. Debt is a tool we can access to achieve those purchases.
The key question you need to ask...?
“Is the debt you’ll incur good or bad?”
How do you discern the difference?
Bad debt is debt incurred by things that when purchased, quickly lose their value and don’t generate long-term income. Bad debt carries a high interest rate, like the all-too-familiar credit card.
The general rule to avoid bad debt is:
If you can’t afford it and you don’t need it - don’t buy it
Putting an expensive pair of shoes on the credit card will only end up costing you more in the long run, because of the interest incurred on your debt repayments.
Cash advance loans (or 'payday loans') are some of the worst kinds of debt. In a cash advance loan, the borrower has until the next payday to repay the loan amount, plus the original fee and any interest incurred. What’s worse, is if you fail to pay back that amount by the next payday, you incur yet another processing fee to ‘roll over’ the loan.
But - don’t sweat! - where there is bad debt there is also good debt
Good debt is an investment. It’s something that will grow in value or generate long-term income. Taking out a student loan to cover education costs is the perfect example of a good debt, as student loans generally have a very low interest rate. Not only that, but getting a student loan is an investment in yourself. A tertiary education increases your value as an employee and raises your potential future income.
Another example of good debt is taking out a mortgage to buy a home. These also typically have lower interest rates, which are tax deductible. Even though mortgages are long-term loans, these low monthly payments allow you to keep the rest of your money free for other investments or emergencies.
Auto loans are also considered a good debt, especially if the vehicle is essential for your business. Unlike homes, cars and trucks lose value over time, so it’s best to pay as much as possible up front so buyers can avoid spending masses on high-interest monthly payments.
It pays to keep in mind the bigger picture
Our key tips for you
- Don’t rush! Just because some debt is considered good, it doesn’t mean it’s the right time for you to invest. Make sure you’re thinking about and discussing the goals you want to achieve and what’s realistic for you.
- Step back! Taking a moment to consider will help you decide whether you really want or need to buy that new house or car, or whether you might wait and save for when the time is right.
- Be smart! Make sure it’s a good debt. Or at least something you know you can pay back quickly. Investing can help prepare you for your future.
If you’re not sure, remember, we’re here to help you. Just contact us and we can help you through the process or answer any questions you might have. And if you have decided now is the time for you to invest in a home, we have a comprehensive checklist you can use to ensure the one you are buying has all the right things to make it a good investment (and avoids the pitfalls of things you DON’T want to be burdened with!). Sign up to our informative newsletter and we’ll send it to you.
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