Australians personal debt levels are among the highest in the world. We carry many kinds of debt that place stress on our life’s and loved ones. If you are struggling to manage your debts, it may be a good time to review your overall financial situation.
Effective debt management is not just about the interest you pay, but also the type of assets you’re investing in and prioritising your debts.
There are two basic types of debt we use in our everyday lives:
- Inefficient debt, and
- Efficient debt
What’s inefficient debt?
Inefficient debt is used to buy goods, services and assets that don’t generate any income. This means you need to rely on your own income sources and assets to repay this debt. Also, the interest cost on this type of debt is not tax deductible.
Examples include home loans, credit cards and personal loans.
This type of debt can impact other wealth building opportunities. Generally speaking, it is better to reduce this type of debt as quickly as possible and try to repay those charging the highest interest rate first. There are a number ways this can be done, such as consolidating your debts into the loan with the lowest interest rate.
What’s efficient debt?
Efficient debt is used to buy assets with the potential to grow in value and generate an income. They can benefit you in two ways:
The income from the asset can be used to help repay the loan, and
The interest cost may be tax deductible, helping to minimise any tax.
This type of loan is often used to help build long-term wealth.
Examples include investment property loans, investment loans and business loans.
Should you borrow to invest?
Borrowing to invest (also called gearing) allows you to invest in assets you wouldn’t otherwise have been able to. It can help spread your money across different investment types, which can help reduce risk.
This greater exposure gives you the potential to magnify your returns, but can also magnify your losses.
If you have built up equity in your home or investment portfolio, you may be able to borrow against this equity.
Bamboo Wealth provides wealth protection advice. Contact us on 1300 855 014.