Almost everybody has to borrow money at some point. It’s impossible to go through life without doing so, but the problem is there is good debt, there is bad debt and there is debt that’s okay. Choose your debt wisely.
Generally speaking, good debt is where an asset is bought that generates income, appreciates value over time, and where the interest cost is tax deductable. A well-chosen investment property would qualify, as would debt to fund your own business or to pay for education and training that will increase your future income.
Bad debt is where an asset depreciates (or has no monetary value like living expenses or holidays) and the interest is not tax deductable.
Debt you should aim the steer clear of includes debt for household items and expenses, car loans and all those wonderful ‘buy now and pay later’ loans.
Top of the ‘bad’ category, of course, are credit cards, but we all know that, right? They are high interest, instant gratification ‘devices’ that ensure you end up paying way more for items than their original price.
Taking on debt to buy a home is in the’ okay’ category as the home should grow in value over the long-term, and the interest rates are the lowest of all debts. You should still pay it off as soon as you can, because the aim is ultimately to be debt free.
If there’s the slightest chance you spend money on things you don’t need each month, then visit a mortgage calculator and plug in the figures of your current home loan and repayments. Next, increase the monthly repayment by $100 a month ($25 per week). You’ll be astounded by just how much money in interest payments you could save over the life of the loan. Do it!
On a $400,000 loan, by paying an extra $25 per week, you could save yourself more than $34,000 in interest payments and reduce your term by up to two years. That’s got to buy you a holiday or six over the life of your mortgage. Or go towards the interest cost of another property.
The lesson comes when the student is ready… So if this has prompted even one person to pay just a little extra off their home loan, then our work is done.