'Debt' - it's a word that can send a shudder down your spine.
But did you know there is such a thing as 'good debt' and 'bad debt'? Understanding the difference could help you make better financial decisions and even improve your quality of life.
Here's a quick rundown of good and bad debt.
An example of good debt would be borrowing money to purchase a home or investment property. This asset may appreciate in value over time.
You could also pay off the loan by renting out the property or claim a tax deduction if the repayments exceed the rental income (known as negative gearing).
Student loans, or other loans with a relatively low interest rate that will generate long-term income or benefits, can also be considered examples of 'good debt.'
A debt may be considered detrimental to your wealth if it does not earn you money or is not tax deductible.
Using a credit card to purchase luxury items is generally viewed as an example of taking on bad debt. However, if you are able to pay off your debts each month without accruing high interest, it can be an effective means of managing your cash flow. This is an example of bad debt being used for good.
They key takeaway: don't put yourself in a position where you are living beyond your means.
It is important that you keep a list of your debts and financial obligations. This will help you devise a budget and manage your money effectively.
If you are having trouble making payments or have been severely impacted by an event such as the COVID-19 pandemic, speak to your lender or financial institution as soon as possible. They can help you apply for financial hardship or discuss alternative arrangements.