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[Infographic] Good Debt vs Bad Debt

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Living life creates debt.

Owning your own home, cars, dining out, and generally enjoying life, all costs money, that you can earn from your income or borrow from a financial institution.

When you are deep in debt, you restrict your ability to build wealth before you’ve even had the chance to start.

That’s why you need an effective debt elimination strategy, a customised plan of action, and a clear understanding of the difference between ‘good’ and ‘bad’ debt.

The difference between these two types of debt can be distinguished as follows:

good debt vs bad debt

 
Always think in terms of serviceability when it comes to borrowing money for property investment.

Being able to service the mortgage repayments is crucial to help to build a successful property investment portfolio, so ask yourself these questions:

  • Can I withstand interest rate rises? If not should I fix in my rate?
  • Is my income secure enough to repay a mortgage?
  • Are my expenses too steep? What can I cut down on?
  • What is my back up plan if the mortgage payments gets to be too much?
  • Do I have the right type of insurance?
  • Am I borrowing this money for the right property, in the right place at the right price?

If you make the wrong decision at the outset and borrow money for a property that is overpriced and you pay too much - then you already have negative equity before you start out.  Learn more about equity in this blog post.

Seek advice from mortgage brokers, accountants, lending institutions, financial advisors and your legal experts before you sign on the dotted line for your next property investment loan or mortgage.

Start considering if each debt you incur is good or bad and make the good outweigh the bad in any way you can.

Here are 6 tips you can use to help you eliminate bad debt:

  1. Make a list include all of your debts and split them into Good and Bad. Bad would include things like car loans (cars are depreciating assets), higher education debts and consumer credit card bills.
  2. Place values and calculate the monthly value of each debt.
  3. Calculate your after tax income each month - and compare this to the total value of outgoings you have to make to service your debts. If the income outweighs the debts you are in the black, but if you work out your debts are currently outweighing your income - it could be time to make some budgeting changes.
  4. Consolidate - would it make more sense to consolidate some of your bad debts so that you're only making one repayment? Mortgage lenders often like debts to be consolidated before they lend money to potential home-buyers or property investors.
  5. Set a budget and work to eliminate your personal and consumer debt so that you can start to move forward with your financial future and acquire only good debt.
  6. Be smart - if you happen to get some surplus income, use it to pay off your bad debts first and foremost - it's hard to move forward and plan for your financial future when you're laden down by debt.


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