Good debt vs Bad debt

23 Mar 2020

Debt, we all have it in some form. Unfortunately, it’s a much-needed necessity to everyday living. Most professionals do not have the means to pay cash for everything. Who does? Imagine being able to buy a house or car cash. 

•    Nearly nine out of ten affluent 23-38yr olds are in debt
•    Over 50% have credit card debt and mortgages
•    Only 12 % have no debt
•    An average of 17% of income is used to pay off debt other than rent and utilities and food 
•    Paying off debt was only the 6th highest priority (affluent millennial money study – the balance.com)

The question is how to use debt to your advantage. Even the small percentage of professionals who can buy everything cash, often use debt. Here we need to distinguish between good debt and bad debt. 

Debt that helps you increase your net worth is generally considered “good debt” – this includes mortgages, business loans etc. You are increasing your assets and in turn they work for you. A mortgage brings you property that will increase in value over time and could generate more income such as long-term rental or vacation rental income. A business loan helps you build a business that will increase in value and generate an income for you. 

“Bad debt” is borrowing money to finance depreciating assets e.g. cars and credit cards. They don’t increase in value or generate an income for you. Cars lose value almost immediately once bought, unless it is a vintage purchased for investment purposes.

•    Try to pay off bad debt as soon as possible – it drains your cash flow and once paid, will leave you with money to invest/save for retirement.
•    Avoid using your credit card for luxury or impulse purchases. It is handy as an emergency back up or when making online purchases -Try to transfer the needed funds into it first before spending.
•    If you must buy a car, consider a one or two-year old used vehicle. It costs significantly less than a new car and is still new enough to be reliable.

If your bad debt is causing you stress and sleepless nights, then chat to your deVere Acuma adviser to help you set up a debt payment plan of action. [email protected]

Please note, the above is for education purposes only and does not constitute advice. You should always contact your deVere Acuma adviser for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.