I am sure you have heard someone say “Debt is bad”.  This has been ingrained into people most of their lives.

For many of us, our parents taught us to pay down our debt.  I disagree.  I say pay off your bad debt, but load up appropriately on good debt.  So what is good debt or bad debt?

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I personally classify all debt into one of three categories.

The first debt is super productive debt.

This debt people use to acquire things that appreciate, or go up in value and provide some form of income, either now or in the future.  For example, an investment property loan.

Providing you have purchased the right asset that appreciates in value more than what it costs you to hold this asset, then this super productive debt is good.

The next is non productive debt.

This is debt people use to acquire things that depreciate, or go down in value.

For example if you put a holiday on a credit card – what is it worth when the holiday is over

How many clothes or shoes do you have that go up in value?

These are also usually at higher interest rates.  When is the last time you looked at you credit card interest rate  – most are currently over 20% when I can get a home loan currently under 5%.  This is four times higher.

This is why I call non productive debt the silent wealth destroyer!

Now I want to talk about productive debt.

Productive is debt that people use to acquire things that appreciate, or go up in value.  For example, their home loan.  Now this debt can be either good debt or bad debt.

Why can it be bad debt you ask?

One area where I see productive debt become bad debt a lot is with people’s homes.  This is why I say for some people a house is their biggest liability.

All you really need is a roof over your head with the required bedrooms and other facilities and this could be anywhere.  But I am sure you know someone who went far into debt because they “had to move to a better suburb” or have a “flashier house”.  The ones who were trying to impress someone or keep up with their so called friends.

What if they borrowed an extra $300,000 to get into a “better suburb” and they borrowed this at five per cent.  If they repaid this loan over 30 years, they would pay nearly $280,000 in interest.  This owner would have spent nearly $580,000 in total for what, a house in a “better suburb”.  I would say that this extra Productive Debt was bad debt, and they could have used this money elsewhere for a much better result.

So to answer the question is all debt bad.  In my view no.

Super-Productive Debt is generally good (providing you buy the right asset), Productive Debt can be either good or bad and Non-Productive Debt is bad.

Now if you have bad debt, you need to get rid of this.

Look out for my video on how to get rid of bad debt coming out soon.

Wayne Wanders

The Wealth Navigator

wayne@thewealthnavigator.com.au

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