What’s the difference between good debt vs bad debt?
If you’re a homeowner, a first-time property investor, or about to buy your first home or investment property, developing a sound understanding of the difference between good debt vs bad debt is a critical foundation in your property education journey.
Understanding the difference between Good Debt and Bad Debt is essential to debt reduction strategy.
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This single piece of education can mean the difference between paying your home mortgage for 30 years or as little as 7-10 years. It will also set the foundation around the conversations you should have with your accountant when investing in real estate. Understanding this lesson can even determine whether you profit from property or lose money in the exercise.
This information will be critical, each time you need to make a decision about your property portfolio, cash-flow, and your mortgages.
Let’s start with a simple definition:
Good Debt is associated with liabilities which works for you – it allows you to claim tax benefits. The purpose of this type of debt is for ‘income producing’ assets such as assets within a business or investing, such as an investment property or shares or a business motor vehicle.
Bad Debt is the debt which is associated with liabilities which are NOT income producing, such as your personal home, personal [use] motor vehicle or personal loans.
The aim is to eliminate the bad debt first and use the good debt to increase your asset holdings, income, and cash-flow position. This is why many educated investors don’t wait till they pay off their family home before they invest in their first investment property. The investment property and associated debt is the good debt which is required to engage a sound strategy to utilize your cash-flow and the ability to eliminate your personal home loan in record time. Your mortgage broker or mortgage coach can explain this to you in great detail using diagrams to demonstrate the power of this debt reduction strategy.
Having a great accountant on your team is critical in determining the level of your success as a property investor and business owner. Your accountant will assist you to maximize your financial and tax position, especially when it comes to important financial, property, and accounting decisions. All great mortgage brokers will have a great accountant close by, for your benefit, if you don’t already have one you know and trust.
All too many individuals start out with the best intentions but lose their way and make costly financial decisions largely due to not fully understanding the difference between good debt and bad debt, and therefore, swaying from your initial plan – worse still, not even having a sound plan in the first place is a sure-fire way to fail in the end.
Where ever you are on your property and finance journey, stop and ensure your knowledge is rock solid before you take another step. Speak to your mortgage broker straight away, you’ll be glad you did.
John J Maxwell, Cocalex Consulting - Director & Senior Consultant