If we were to go into a list of things with a BAD reputation – debt would be right up there with service station sandwiches and MLM schemes.
And it’s for a good reason. Debt is usually associated with financial stress, high-interest repayments, and the very real risk of falling into a cycle that is extremely hard to get out of.
Because of this, many of us are taught growing up that debt is something that should be avoided at all costs. We’re told to pay it off ASAP, never sign up for afterpay and to only get a credit card if we’re SURE we can handle it.
And this is all sound advice, but it misses the fact that sometimes GOOD debt – when used strategically, can actually help you to build wealth, and it’s not necessarily something that should be avoided.
So what’s the difference between the debt you should avoid and the debt that could do you some favours? And how can you make sure you won’t fall into a whirlwind of repayments you can’t afford and financial stress you just don’t need? Let’s talk about it:
The difference between good and bad debt:
Not all debt is created equal, and there are some KEY factors that can help you distinguish between good and bad debt.
Bad debt: This is the kind of debt that drains your finances, without any kind of financial or wealth-building return.
Some examples of bad debt:
- Credit card debt
- Loans for non-essential purchases (like afterpay-ing that new pair of shoes you’ve been eyeing off)
- Car loans (especially fancy cars that are way too much of a stretch on your budget)
- Loans on depreciating assets that have no long-term benefit (think jetskis)
Good debt: This is debt that helps you build wealth over time by funding you for assets that will increase in value, or put money straight in your pocket.
Some examples of good debt:
- Property Investment
- Student Loans
- Business loans
How can you make GOOD debt work for you?
The key here to use good debt to build wealth is in using it strategically. Here’s how:
- Borrow with a clear PURPOSE: Before you take out that loan, a strategic move would be to ask yourself “will this debt help me to increase my wealth or earning potential in the long run”. Things like taking out a loan for a property that will increase in value over time or going into debt for a degree that will lead to a solid income in the future will all answer this question with a yes – and that’s a pretty trustworthy way of knowing you’re using your debt in the right way.
- Understand the terms of your loan: Looking at things like low interest rates, flexible repayment options and tax benefits can make a huge difference on just how much you have to pay off. The key here if you are going to borrow, is looking for the most favourable terms possible, and doing your best to avoid any fees that you don’t actually need to be paying.
- Don’t over-commit: Just because you CAN borrow a certain amount of money, doesn’t mean that you SHOULD. It’s always best to borrow an amount that is still sustainable for your lifestyle – this will avoid things spiralling out of control.
- Appreciating NOT depreciating: Remember – good debt comes from things that go UP in value over time like real estate, education or business loans. Credit card debt, buying a fancy new car just for the sake of it, or borrowing money to get you through until payday aren’t strategic decisions, and it’s not the kind of debt that will set you up for financial success in the long run.
- Have an exit strategy: Perhaps the most important point of all is to have a clear and defined repayment plan in place. Whether you’re paying off your debt through rental yields, business income or higher salary earnings, you need to have a clear path to pay off what you owe without causing yourself financial stress.
As we’ve established – not all debt is bad, but similarly, good debt is only good when approached strategically and smartly.
Taking advantage of GOOD debt to set you up with a solid foundation to build long-term wealth is one of the secrets to financial freedom that a lot of people overlook, so understanding exactly how it works, and how you can use it to your advantage is a game-changer for achieving the wealth of your dreams.
Our mission at InvestHER is to empower women to take charge of their financial futures, and build this long term wealth that we ALL deserve. So we’re here to help in whatever way we can. Reach out here to find out more about how we support women just like you on their financial journeys, and let’s make your $$$ dreams a reality!