The Debt Factor: Why it's Good for Your Financial Health

For most Australians, debt is a part of life. It’s difficult for most people to pay cash upfront for large expenses such as university tuition or property, and so taking out a loan has become the norm for many families. However, while most people tend to shy away from gaining too much debt, good debt (in the right amount) can be beneficial for your financial health.

Acquiring debt is not always a bad thing; it’s just about finding the right balance and knowing what kind of debt is good, and which is harmful.

How do you know the good from the bad?

Good debt is efficient; it helps you to build financial wealth. Good debt involves investing in an asset such as property, shares or higher education. These things are beneficial to you in the long term as they grow in value, generate income and can be interest tax deductible.

In contrast, bad debt is inefficient; it usually costs you more without helping to build long-term wealth. This type of debt involves credit card debts and personal loans for depreciating assets, like cars. These types of debt decrease in value immediately after purchase and can cost you more in interest than what it was originally worth.

Having the right kind of debt can set you up for the future.

You can use debt to build a property portfolio

Borrowing money from the bank or using existing equity to invest can be an excellent way to build your property portfolio. Using a loan, you can invest in an appreciating asset, which will grow wealth as well as pay off the debt you acquire. It’s important to select property assets that are positioned for strong capital growth with little risk of vacancy.

Evidence of a reliable credit standing

When applying for a home loan, your broker and lender will evaluate any outstanding or past debts you may have. If there is evidence of your ability to manage debt and pay it off, they are more likely to take your application seriously knowing you can make repayments. However, if they notice your debts continuing to pile up, they may take this as a warning sign.

You can use debt to improve your professional standing

The great thing about university debt is that it allows you to improve your educational level and can set you up for a higher position in the workforce. In this way, this kind of debt benefits your ability to apply for future job opportunities that are only available to those with higher qualifications.

Gives you the skills to manage your money better

When under pressure from managing, and paying off your debt, you are forced to adhere to a budget. While you can view this position as tight, it allows you to develop discipline and budgeting skills. Living through the experience will most likely make you money conscious, and can help you to gain control over any excessive spending habits you may have had.

You gain long term focus

When buying into long term debt, for example; a mortgage, there is a need for you to think in terms of the long run. When the average mortgage lasts up to thirty years, you will most likely need to adopt a long-term focus and think about how it will affect your financial endeavours and retirement goals. Focusing on the future can benefit your ability to strategise for the future and work towards growing your wealth further.

At Select, we offer no-obligation, quality and free advice to help you reach your financial goals. If you are unsure about whether a loan will fit into your budget, give us a call on (08) 9417 3399 and organise an appointment to talk with one of our helpful brokers.