Have you ever heard the term ‘good debt’ or ‘bad debt’ and wondered about the meaning? In most cases, debt used to purchase assets that produce an income (for example a portfolio of shares or an investment property) qualifies for a tax deduction in relation to interest costs and is quite often referred to as ‘good debt’.
Alternatively, debt used to purchase services or assets which do not generate an income (for example, to purchase a principal place of residence, a car or fund a holiday) do not qualify for a tax deduction in relation to the interest costs and are referred to as ‘bad debt’.
Wherever possible you should try to accelerate the repayment of your ‘bad debt’ and achieve:
- A reduction in the total interest paid on this debt.
- Increase the equity you have in your home, which can potentially be used as security to borrow for investment purposes later on.
- Potentially provide you with more cash flow at the end of the loan term that can either be used to repay other debt or make additional investments.
If you would like more information on understanding debt management, please call us.