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Not all debt is bad debt

Posted by Paul Wilson

What are your feelings around debt?

Many people are under the impression that all debt is bad debt – but this is simply not the case.

Yes, bad debt will diminish your cash flow and is detrimental to your wealth creation goals, but good debt can greatly improve your financial position.

Good debt helps you purchase wealth-building assets, and the costs incurred are tax-deductible.

With good debt, your overall financial position will be better as you are able to leverage the assets purchased.

Let me explain further…

Recently, a client came to me who wished to start building his investment portfolio.

David (not his real name) is a high-income earner who already owned his own home and was paying down his home loan fairly quickly.

But, he was raised to believe all debt was bad and he was at a crossroads.

He wished to purchase investment properties but believed he needed to pay off his home loan before he could start investing.

When I analysed his financial position, I found that he was paying over $100,000 in tax per year!

David’s fear of debt meant he was paying much more tax than he needed to be paying, as he wasn’t optimising his financial potential.

To help David’s understanding of debt, I did some cash flow modeling in conjunction with a financial planner to illustrate David’s current financial position, and the financial position he could be in if he engaged good debt through investing.

We were able to demonstrate to David how to differentiate between good debt and bad debt, and what he needed to do to reach his full financial potential.

Once David understood that he would be in a much better financial position if he did invest now, we set about searching for the right investment properties to suit his financial structure.

In the end, the amount of money in David’s pocket was much greater than if he didn’t have the good debt – as the good debt reduced the amount of tax he paid enabling him keep more of his income.

Through the power of leverage – utilising good debt to build an investment portfolio – David was able to fast track his wealth creation strategy.

Before he met with us, David was underutilising his potential and this was negatively impacting on the opportunities available to him.

By employing the principal of leverage, David is now in control of his assets and is growing his portfolio.

The capital growth potential each investment property provides will increase his wealth and help grow his other assets.

If David just held on to the one property (his home), he wouldn’t have been able to leverage into wealth creation strategies.

He would also have less money in his pocket and be paying too much in tax.

If you, like David, want to get a better understanding of debt and how to leverage your position to grow your wealth, book in for your strategy session. We Find Houses can help define your strategy and show you ways to get the most out of your situation.

Call 1800 600 890 or email to get started.

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