You may have heard people talk about “Good Debt” vs “Bad Debt”over the years. But what do each of these terms mean?

Lets get the bad news out of the way first…

Bad debt is pretty much any loan or credit card commitment that hasn’t been used to fund the purchase of an asset that will either grow in value or generate income over time.

Bad debt is often used to purchase things like disposable household goods, holidays, cars and lifestyle costsings.  These things won’t ever grow in value and are often worth nothing as soon as they are purchased or used!  The use of debt to fund such things won’t improve a person’s financial well being.

Now for the good news.  Not all debt is bad!

Good debt is used to fund assets that will tend to improve a person’s financial well being over the long term.  Borrowing to invest in property or shares is considered good debt as those assets generally produce some income and will grow in value over the longer term.  Borrowing to buy your own home is also good debt as it will generally result in an improved asset base over time.

For advice on how to structure your debts, including how to reduce your bad debt whilst increasing your good debt, don’t hesitate to contact your financial planner or accountant.