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Good Debt vs Bad Debt
Manage episode 460051293 series 3622909
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Today, I want to talk about something crucial that can shape your financial journey: the difference between good debt and bad debt. You'll learn how to identify the difference between the two and discover strategies to manage your financial obligations effectively.
So, why do we need to understand good debt versus bad debt? Many people are just embarking on their financial journeys, and others may never have been taught these differences. Identifying these can be crucial for financial health and planning.
Good Debt vs Bad Debt
Bad Debt: This is the debt you've accumulated buying items that don't grow your wealth, like furniture, cars, holidays, credit card spending, and more. They're called "bad" because they don't generate income and aren't tax-deductible—only dragging you down with interest payments.
Good Debt: In contrast, good debt contributes to potential future wealth. This might include an investment property or loans taken out to buy shares. These investments generate income, making the interest tax-deductible and integrating positively with your financial plan.
Practical Strategies
Determining what’s good and what’s bad debt is part of my job, and I advise clients to repay any bad debt quickly. For example, if you have a home loan (not income-producing), I actually consider this to be bad debt, and you should aim to pay it off swiftly. Meanwhile, if you have an investment loan, focus on paying off the home loan first.
If you have considerable bad debt, list it out and start the snowball method: knock off the smallest amounts first to permanently close those debts. Then, proceed to the bigger debts. This method not only clears your debt but also builds additional financial capacity for future investments.
Your Financial Path
Remember, every person’s financial journey is unique. If you’re nearing a payoff on your home, consider utilising that equity for investment to build a more robust financial portfolio. Collaborate with professionals to shape the strategy best suited to your needs.
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