Good Debt Versus Bad Debt – Understanding The Grey Area

Debt is due for a rebrand. So often when we hear about debt in the news, it’s within the context of “bad debt” – households in over their heads with credit card bills and interest payments; students working three jobs to chip away at college loans; house-poor millennials saddled with mortgage payments because they tried to get in on the market before it moved even further from reach.

But not all debt is bad. There are ways to leverage it in order to open up economic opportunities that will advance your financial plan. The key is to learn how to talk about it and cut through the noise.

While mortgages, student loans and investing in your business are often classified as good debt, and cars, credit card debt and vacations are commonly seen as bad debt, it’s a bit more complicated than that. For instance, what if that car helps grow your business opportunities or what if you’re living beyond your means with the mortgage?

It’s time to re-calibrate the way we look at debt and see how it can be used to your advantage.

Understanding the grey area

We often look at the dividing line between the two as if it increases your net worth or has future value, it’s good debt. And if it drains your wealth and decreases your value, it’s bad debt. But this also negates the point that all debt comes at a cost and that cost of borrowing needs to be considered. Further to that, the cost of your debt should be considered in your financial plan.

Ask yourself: Are you borrowing money at the best possible rate and are you prepared if interest rates rise in the future? How will leveraging this debt improve your finances in the future? And what’s your response if things go awry?

Part of keeping good debt from turning into bad debt is stress-testing the different scenarios, knowing your comfort level, and developing a plan.

Using debt to your advantage

Our role as your financial planner is to set you up for the future, and part of that is managing debt. Together we can identify strategies that help you use debt to your advantage – from mapping out your cash flow and identify the debt problem areas to prioritising expensive delinquent accounts over lower interest and less pertinent debts. Debt can be restructured into more beneficial vessels that allow you to draw equity or consolidate the amounts you owe.

Although this may work for some, others may encounter a different situation so it’s very important to speak to us or a professional adviser regarding your debt and how to manage it effectively. Debt can also have a negative impact on your credit score which I another reason to have a professional look into your unique situation.

So don’t let debt’s bad rep get in the way of a good strategy. Talk to us about how it can fit into your plan.

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