Let’s get clear on what debt means exactly...
A debt is using other people’s money to buy or invest. Might seem obvious, but when we can practically wave credit cards in our sleep, it’s even easier to forget to question, who’s money am I actually using right now?
Not all debt is created equal, some can leave you stranded, empty, powerless and stressed while other types can set you up for life. YES! More of the latter please. But how can you tell which is which?
We wanted to get clear on ‘the good, the bad and the ugly types of debt’ before the session. Here’s what she says:
Let’s start with the ugliest of debt...
Ugly debt is consumer credit, including credit cards, store cardsand even hire purchase deals. Consumer debt has the highest interest rate and is very easy to get because banks love you having it. It is used to purchase goods and services that decrease in value, things like clothes, shoes, dinners, wine, massages, pedicures, makeup…
The more debt we have, the more money the bank makes. That’s why they rub their hands together when we agree to automatic credit card upgrades. Be aware, this is all about how you can help them make more money and not about how they are being even kinder allowing you to borrow more.
Money Empowerment Lesson No.1
Let’s get your money working for you, instead of the banks.
If you must keep a credit card, make sure you are going in with your eyes open. If you are able to use a credit card sparingly and pay off the full balance each month then possibly you could keep using your credit card. If not then you (like most of us!) would be better off with only using a debit card instead. Worrying about credit and being anxious about paying off an ever-increasing debt is not what a superwoman is supposed to feel.
So what about Bad Debt?
This may come as a surprise to you but a mortgage on your own home is considered bad debt. Buying a home to live in is a wealth creation strategy, but your mortgage does not help reduce your tax.
Many Australian’s buy “too much home” and can barely afford their mortgage repayments. They struggle from month to month and year to year and never reduce their debt.
Money Empowerment Lesson No.2
If you want to own your own home, save a 20% deposit so you don’t have to pay the bank loan mortgage insurance and buy a home you can easily afford. Don’t expect to buy your dream property the first-time round. Start small and upgrade only when you can afford to. This is the smart route to owning that dream property in the future and best of all, you still have a bit of money left over to make that annual holiday (opposed to sacrificing all fun because you’re mortgaged up to the max).
... And lastly the oh so Good Debt
Yes, there is such a thing, but it’s not for the fainthearted.
Good debt is a loan used to purchase income producing assets. Interest on loans used to invest in property, managed funds, shares and business may be tax deductible and it can help you create wealth and reduce tax at the same time. You are still using someone else’s money but this way you are using it effectively. That is why it is considered good debt.
You need to have a conservative financial plan in place and you must insure your income and have enough cash reserves along the way. But when used wisely, good debt can help you create an investment portfolio and secure your financial future.
Money Empowerment Lesson No.3
There are many ways to invest your money and this is where getting some professional guidance can make all the difference! Looking at ways to make your money work for you is smart, and with the close guidance of a financial adviser you’ll understand the risks versus the rewards when taking on debt - because even good debt can turn on you. You need to invest conservatively and only in the highest quality investments.
If you are considering taking on good debt to increase your wealth, you need to be aware that including debt in a wealth creation strategy can increase your returns, but it can also increase your losses when there is a market downturn. It is important that you seek the guidance of a financial adviser when taking on debt.
At Thrivhers we understand that bringing our awareness back to our financial lives is one of the most empowering tools we can utilise. Gone are the days where money is a dirty topic. Let’s make the conversation positive, be proud of saving, let’s understand the value of our paycheques, let’s nourish the money we have, because if we look after wealth, our wealth will look after us.
Nicole Heales is an Authorised Representative of Capstone Financial Planning Pty Ltd ABN 24 093 733 969 Australian Financial Services Licence No 223135
Disclaimer
This article dated 30th August 2018 is given in good faith and is derived from sources believed to be reliable and accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such.
Information contained in this article is of a general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you obtain investment and taxation advice specific to your investment objectives, financial situation and particular needs before making any investment decision or acting on any of the information contained in this article.
Subject to law, Capstone Financial Planning nor their directors, employees or authorised representatives:
Gives any representation or warranty as to the reliability, accuracy or completeness of the information; or
Accepts any responsibility for any person acting, or refraining from acting, on the basis of the information contained in this document.
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