Debt can be an excellent tool that can be put to great use in building your wealth…BUT it’s important that you be clear on the difference between your GOOD debt and your BAD debt.
Good debt is putting somebody else’s money, such as the bank, to good use in building your net wealth, while bad debt can be highly destructive to your own personal financial wellbeing.
Borrowed funds to invest in assets that will grow our net wealth in a tax efficient manner, such as shares, property, or other appreciating assets, is considered GOOD debt. Funds that are borrowed for consumption such as expensive dinners, holidays, cars or other personal items is considered BAD debt.
Consider the following two case studies:
- John and Susan have borrowed $500,000 to purchase their first residential investment property. John and Susan can structure their investment property finances so that it costs them very little on a weekly basis to hold and grow their asset base. Given the purpose of the loan, depending on the jurisdiction, the interest expense on this debt may be tax deductible.
- Alex and Michelle have spent $30,000 on their credit card to pay for a family holiday. The interest rate payable on this debt is 19% per annum and is not tax deductible for the couple.
The first example is clearly an example of GOOD debt. John and Susan are utilising the bank’s money in a tax-efficient manner to grow their asset base. The interest expense on their debt may be tax deductible and they can continue to utilise the bank’s capital to grow their net wealth. Alex and Michelle, however, will be paying 19% in non-deductible credit card interest for their personal holiday. They should therefore be quickly working on a strategy to eliminate this debt as quickly as possible.
It’s important that as part of your personal financial strategy you have a plan to pay off and eliminate your BAD debt, and ensure that you are putting your GOOD debt to efficient use. With the end of 2015 fast approaching, this can be an excellent time to review your debt and ensure that you have a personal wealth plan in place.
To your financial success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
Book a complimentary consultation here.