What is good debt? What is bad debt?

If your main goal is to make money, then using mortgage debt to leverage into a property is a great idea. As long as you do not overpay for the property and buy in a good area, the long-term benefit of owning the property as a family home or rental should prove to be a financial windfall. Capital gains, rental yield, inflation, and the ‘forced savings’ of having a mortgage should help you on your path to building wealth. Good debt is money you borrow that allows you to make more money. Bad debt is borrowing money that does not improve your chances to make money. Borrowing to buy a TV or holiday, whilst fun and a good fix from retail therapy, if you are still paying for the TV or holiday years later then you probably made a mistake.

Where we see people make the biggest mistakes is when they get multiple credit cards from different banks, use GEM Visa, Q Card and other financial products to fuel a lifestyle that is beyond their affordability. Do not kid yourself. Debt is borrowing from your future self.

Imagine you are out for lunch and go to buy a pie, just before you order you get a tap on the shoulder with your past self from 3yr ago holding out their hand for some money, for a TV you no longer use and a car that you’re already tired of… you go to pick up dinner, takeaways, and past-self taps you on the shoulder to pay for your trip to Aussie in 2015… you go to put petrol in your car the next morning and past-self taps you on the shoulder again to pay for all the meals out in 2017… the cycle continues as your past-self asks you for money and you think ‘if only I can borrow from my future self…’

Don’t fall into debt traps. Reset things with a debt consolidation into your mortgage if you have to, or consolidate into a personal loan on a better rate. Look at your decisions with a critical eye and start budgeting better if you want to build wealth the debt you use should be helping you accumulate assets that produce cash flow and capital gains, not fill your belly and make you look good on the road.

Seek advice from books and financial advisers.