Debt is bad – I don’t want to borrow!
That’s what I heard someone say at
friends last weekend.
The conversation had turned to real
estate and how hot the property markets are at present (as it usually
does) and one of the group standing around said: “I’ve almost paid off
my house – I hate the thought on taking on more debt.”
So the question begs, is all debt
bad?
Fact is you can’t work or save your
way to wealth.
If your money isn’t working for you
when you’re asleep you’ll never become rich.
And for your money to work for you,
you must leverage it – you must take on debt.
So…if you’re not in debt, chances
are you’ll never become wealthy or achieve true financial freedom.
Of course not all debt is good.
As
I see it there are 3 types of debt:
1. Necessary debt
This is the debt you need to take
out against your home.
While the interest is not tax
deductible, the debt is necessary to provide a roof over your head and the
value of your home should increase over time.
2. Good debt
Good debt is ‘efficient’ as it helps
you buy appreciating assets such as investment properties and the interest is
tax deductible.
Even better the rental income from
the investment property helps you repay the debt, and if you claim depreciation
and negative gearing, the tax man and your tenant share in your mortgage
repayments with you.
3. Bad debt
Now this is what I consider
‘inefficient’ debt and can keep you poor forever.
Bad debt buys you assets that
decrease in value over time like “toys”, fancy cars, gadgets etc.
Worse still the interest you pay the
bank is not tax deductible and repayment of the debt is from your own resources
Now don’t get me wrong…
I like my toys as much as the next
person, and now I can afford them because I’ve built a substantial asset base
of income producing properties.
I did this by spending less than I
earned and investing the difference.
Then I saved up a deposit and took
on good debt to buy my first investment property.
Then I took on more good debt to buy
the next property and the next one, until I could afford the luxury of taking
on bad debt to reward myself.
Invest now using the necessary debt as start up. Don’t take
a bad debt to ruin your tomorrow.
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