Good Debt, Bad Debt.
You may have heard a rumour that there’s ‘good debt’ and there’s ‘bad debt’. The truth is that good debt, bad debt is as clever expression that spruikers use to sell something; or people repeat because they bought the a spruiker’s banter, In the real world debt comes in two types. Manageable debt and terrible debt. Neither of these is inherently good. Obviously, the former is better than the latter. Terrible debt is debt that ranges from being vaguely concerned about future rate rises, right through to finding yourself in a situation where you struggle to, or cannot make a repayment on one debt or another.
Most people with terrible debt don’t start out that way nor. And most didn’t have a burning desire to get into terrible debt either. Instead, they meander there aimlessly through a series of poorly informed decisions. The long list of ‘necessary purchases’ that wound up being not so necessary after all; a list of credit cards with ridiculous credit limits and interest free deals and so on.
More Debt = Less Control of Your Life
When you have debt, you have less control over the money you have to do the things you need or want to because you can’t control your interest cost. This means you don’t control your repayments.
The larger your debt is, the less control you have over your money and the harder the debt is to repay.
Larger debt also means more compromise on how you live and creates an increased risk that you will run into trouble.
Spruikers of negative gearing as a ‘good debt’ strategy argue it’s better to pay interest, than pay tax. This idea might have instant appeal because most of us hate paying tax; however, it only considers part of the picture. If you’re making a loss it really doesn’t matter if you are throwing your money at the taxman or a lender does it? You are still shelling out your hard earned cash to other people.
There are good investments and bad investments. Some are worth buying; some are not. Debt is a vehicle some people use to acquire them.
Whilst debt may be helpful in purchasing large assets that would simply be too difficult to buy outright with savings, debt is otherwise bad. Taking on any new debt should always be considered carefully and once you have debt, it should be eliminated as soon as possible.