It wasn’t that long ago that most people’s money mindset were focused on simply paying down the mortgage on their homes.
That was certainly the goal for baby boomers, who spent most of their working lives paying off their home loans.
Then, for many, they spent their retirement years struggling to survive on the pension.
It hardly seems fair, does it?
However, over the past two decades in particular, more and more people, including baby boomers, decided that a retirement spent in poverty wasn’t for them.
So, instead of siphoning all of their spare cash into their home loans, they opted to invest it into assets that would grow in value over time.
In essence, they transferred non-deductible debt in their home to deductible debt in investment properties.
When debt is bad
There is no doubt that financial literacy has increased over the past few decades.
Today, most generations have a better understanding of how to improve their financial futures, including knowing the difference between good and bad debt, because not all debt is of the negative kind.
Bad debt is when your credit card is always maxed out every month because you can’t stop yourself from overspending on things like UberEATS and you never have the money to pay off the balance every month.
It is also debt such as personal loans that are used to buy cars, that you often don’t really need, but are lumped with a double digit interest rate that will see that price that you paid skyrocket to far more than it was ever worth.
A new form of bad debt has arrived recently, too, which is short-term lending on discretionary items like a new pair of jeans through services like Afterpay.
Of course, it’s promoted as having no fees attached – and it doesn’t as long as you pay the required instalments on time.
If you don’t, well, then you’ll be hit with various late fees.
It’s yet another way that people who are prone to overspending are kept on the bad debt merry-go-round.
When debt is good
Good debt, on the other hand, is borrowing other people’s money (such as the banks) to make money.
As Robert Kiyosaki, author of Rich Dad, Poor Dad, says good debt is used to buy money-generating assets like rental properties.
Further, Kiyosaki has always advocated leveraging and using real estate as a primary builder of passive income and wealth.
Kiyosaki’s famous book was released more than 20 years ago, which is about the same time as people in Australia became more interested in investing in property as a wealth creation vehicle.
Today, there are about two million property investors in Australia, however, about 70 per cent only own one property.
Now, that’s often because they have selected the wrong asset or location for their first investment and are stuck on the sidelines because of it.
Savvy investors, though, select the locations, and the properties, with the very best chances of capital growth over the medium- to long-term.
If they don’t have the knowledge themselves, well, they work with experts like us!
Regardless, by optimising their investment property selection, they are then well placed to reuse the equity growth in a few years to purchase another asset – and so on and so forth.
Of course, this has always been a sound investment strategy, but even more so at present with historically low interest rates meaning that the value of your money in the bank is going sideways at best.
A recent example is one of our clients who purchased his first investment in Victoria for $330,000 and has made $140,000 equity in less than two years along with yields of six per cent.
This first investment allowed him to leverage into his second investment shortly after – buying in Queensland for $325,000 with a yield of 5.92 per cent.
That is an example of wealth creation using good debt right there.