What is Good Debt and Bad Debt?

Bad Debt

Is any borrowings that are used to purchase something that drops in value or has even no value after buying it.

This includes easy finance from places such as furniture stores. A holiday, a car or even a spa are further examples.

You are in effect paying money (interest) to lose money. Bad Debt hobbles your ability to be independently wealthy. This means any debt over your own home also costs more as it hangs around longer. What could have been extra repayments on your home loan have been diverted to paying extra (interest and capital) for something now worth far less. Indeed, income that could have been put to work to purchase Good Debt that boosts your financial security, is curtailed. A double whammy on your future.

'Bad Debt stunts your ability to produce real wealth'.  Banks like people using Bad Debt, they make more money. It's a sad fact that it is not just the young, as a large number of people are entering retirement still with a mortgage.

So what is Good Debt?

'Using debt to purchase an asset that produces something that INCREASES in value. Cars, spas, and holidays drop in value. they also do not produce an income.

Good Debt is any borrowings that are used to invest in something that pays an income and increases in value over time.

It is even better, if part of the income that those assets produce can be easily recycled back into that asset; so it grows and produces even more income. A virtual spiraling upwards of reward.

This income can be used to reduce the outstanding Good Debt, if that is what makes you feel more secure, or you can use it to acquire more Good Debt to buy more assets that go up in value, producing more passive income. Yes, a tax deduction is also often available on the interest paid like some Bad Debt investments (think cars).

Buying a rental property is a popular Good Debt choice but its ability to grow and to add incremental additions is technically partially restrained. Additionally, not being a readily liquid investment, it is hard to sell just a piece of one when you need it for something. For retirees in the post-Covid world, this is a really big factor to consider as spending your capital in regular increments will be the case for most retirees.

Investing into multiple quality, proven businesses with lower risk and little effort and time required, has a mathematical advantage over property. The businesses listed on markets allow you to spread your risk as well as redeem only what you need instantly, whenever you want. The best good assets meet the preconditions of value creation and a passive income.

A Rule of Thumb for having indulgences:

Life is a mix of responsible money management and also using it for ones enjoyment. Try this rule for balancing the two.

On your bigger ticket indulgences, use only the income that is spare from what your good investments produce and not money from your salary.

Your salary is for buying the essentials and to pay yourself first. Paying yourself first is about diverting part of your salary into investments which then produce passive income, ad infinitum into your future.

Thus, if you want a sports car, rent it for a month from your passive investment income or use your passive income to pay the lease on one.

A spa or holiday perhaps? Then save the cash from the passive income of your investments and then purchase it from savings.

A Good Life is a smart mix between the here and now and your future.

Sustainability is not just about nature - it is also about your life too.