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Good vs. Bad Debt: Finding the Right Balance

By Administrator 14 December, 2015

The word “debt” often comes with negative connotations and has associations with stress and struggle.

But debt is not always bad and there is a difference between good and bad debt – you just need to find the right balance.

What is good debt?

Debt is generally considered to be good if it helps you in the long term. Student debt is a good example, particularly because it has a low interest rate. Good debt is also debt that is used to purchase wealth-building assets, such as those that provide you with income or will yield value over time. Good debts are also often tax deductable (e.g. the interest of mortgages).

So, what is bad debt?

Bad debt, on the other hand, is debt that is used to purchase items that you cannot reasonably afford. It also often comes with high interest rates e.g. credit card debt.

Unlike good debt, bad debt is used to buy assets that will fall in value quickly and do not generate long-term income. Examples include using a credit card or personal loan to fund vacations and buy luxury items. Basically, if you start living beyond your means, you are accumulating bad debt.

Can bad debt ever be good debt?

Yes, in some instances. For example, if you are well disciplined and consistently pay off all your credit card debts by the end of each month, your “bad debt” has been used positively to manage your cash flow. Using credit cards might enable you to keep your money sitting longer in a savings account where it may earn you interest.

Finding the right balance

At Debt Free Australia (despite our name) we believe that, while living completely debt-free sounds ideal, it is not necessarily the smartest way to manage your finances. It’s all about finding the right balance. Debt can provide positive outcomes, such as fruitful investments and an improved cash flow.

Our golden rule is: if you can’t afford it and it doesn’t provide you with returns, don’t invest in it.

To learn more about how to find the right balance between good and bad debt, call the insolvency experts at Debt Free Australia today. We provide free professional financial advice on any personal debt problems you may be experiencing, such as cash flow problems or snowballing credit card debt.

Speak to one of our friendly advisers today by calling 1800 676 598.