Not all debt was created equal – some is actually good for you. Bet you weren’t expecting to hear that!
Debt that works for you
Good debt helps you buy an asset that is likely to rise in value, or generate an income for you, such as:
A home loan, as the value of your property is likely to rise over time.
Borrowing to start a business, since it enables you earn an income while building a valuable asset.
Borrowing to invest, especially if the loan interest and other borrowing expenses are tax-deductible.
Of course, not every business or investment is successful. To come out ahead, you need to earn an after-tax return greater than your after-tax borrowing costs over the life of your loan. So do your sums before you invest, and consider the tax implications of your investment decisions carefully. If you need advice, talk to a Financial Planner or Accountant.
The Dos
Have adequate insurance. Make sure your ability to earn a living, your home and assets are properly covered.
Make extra repayments if you can. Extra repayments (even fortnightly instead of monthly) can save in interest – you’ll end up paying off your loan faster.
Make sure you understand the costs, and expected returns before you commit.
And Don’t
Overextend yourself.
Take out more debt than you can handle – factor interest rate rises into any repayment.
Borrow to invest without doing your homework.
Debt to avoid
Going into debt to buy things you can’t sell or that will lose value over time is not a good move. For example, a holiday on plastic is never a good idea as once the holiday’s over, you have nothing left but the memories – and a monthly credit card bill.
Another common mistake is borrowing for a depreciating asset like a fancy car. Cars tend to lose value rapidly, leaving you with a loan to repay and an asset worth less than the original selling price.
The Dos
Pay your credit cards off promptly. By paying them off before the end of the interest-free period, you get the convenience without a financial penalty.
Be sure that you are managing your cashflow and planning ahead.
Use your money for expenses not repaying borrowed money.
And Don’t
Tie up your spare cash paying off debts. By having some surplus, you can stay prepared for emergencies and avoid getting into debt unnecessarily.
Bury your head in the sand. If your debt is getting out of control, talk to someone – your lender, a coach, broker or debt counsellor.
Find out more
At Nutshell Money we can show you how to manage your cash to pay off your debts and build wealth faster, without sacrificing your lifestyle – get in touch today.