There are two types of debt: good deb and bad debt.
It is quite important to understand the difference between good debt and bad debt.
What is good debt?
Good debt is money borrowed that provides you with a source of income, or it gives you capital to buy an asset that will increase in value. Good debt has the potential to increase your net worth or enhance your life in an important way.
A good example is a loan for education or ‘possibly’ a mortgage, depending on the market.
1, Is good Loan for university degree?
Since its inception in 1989, the Higher Education Contribution Scheme (HECS) has become an integral part of the Australian higher education system.
You pay back your HELP debt through the tax system once you earn above the compulsory repayment threshold. The compulsory repayment threshold is different each year. The compulsory repayment threshold for the 2021-22 income year is $47,014. The compulsory repayment threshold for the 2020-21 income year was $46,620.
If you want more info about HECS loan and pls see the government website https://www.studyassist.gov.au/paying-back-your-loan/loan-repayment
This is definitely the first solid steps for FI or wealthy creation.
From research, University degree will earn more money than high school degree. Especially in 21 century, a lot of labour job and low end job will cut. Active income from job is most important for first step for wealth creation and any passive income later. This is good debt to invest in yourself. Even if you really want to learn, you can learn anything in Internet. But university still give the people system to finish specified knowledge, such as dentist, engineering…
2 . Is home mortgage good debt?
Many years ago, I read Rich dad and Poor dad. He talked about whether you borrow money to buy the home. Is your home good asset? Is mortgage for your home good debt?
The home is asset when you only sell it for 10-20 years time. It has tax benefit in Australia and you do not need pay any tax on your main resident home. For example, if you bought home 20 years ago for $300,000. Now, you sell 1.2 million and you has $900,000 capital gain. You don’t need pay any tax.
But when you live in your home, actually, there has a lot of expenses related to the house. It can be liability. Because it keeps going to take money from you.
I just list some expense related to home ownership.
1, council rate. $1000-$2500
2, Home insurance and building insurance. $500-700
3, Maintenance cost, $500-$10000 depend on the age of the building.
In Australia, I found that the house is extremely expensive. Normally house with 600 seq land in middle suburb, it had already over 1m-1.7m range. Sometimes, it made me to think how average Australia young couple can afford 1-1.7million home. Their combined income $150,000 before tax.
When you put large amount take home salary into mortgage, it can limit opportunities and quality of your life.
3, Is business debt good debt?
It depends on the people’s ability, intelligence and experience to run it. It can be good debt or huge financial disaster
.
Generally speaking, successful business is number one tools to create income. Being your own boss is often both financially rewarding. When you see so many you tuber earn $500,000 in such young age like 23. It is real. But around the world, only few of you tuber did.
Business is risk and it can be rewarding, but it also can be finance stress if fail. Let me tell you the real story. My brother in law borrowed $380,000 and bought franchise Subway. After 10 years time, it sold for $250,000. It lose $130,000 and not need mentioned business interest rate. I can list few reasons for subway lose value for over years.
1, long work hours and the owner lose lifestyle.
2, One of the highest royalties charged in the food industry: 8% royalties.
3,Super high marketing fee. 12.5% fee be charged. After pay 12.5%, the owner just work long hours for very
4,Consumer habits are changing, and Subway is not keeping up to new demands
What is bad debt?
Bad debt, on the other hand, is money borrowed to buy something that loses value.
1, car loan.
It is quite expensive if you need borrow money and buy the car. You should only buy the car with cash which you can afford. Because the car loan interest rate is from 5%. Sometimes, you cant even get 5% dividend rate. As soon as you begin car loan, you will put one feet in high interest rate trap.
Typically, the average interest rate on car loans is set at almost 5% to a whopping 17%.
2, High interest rate credit card
Why they said that credit card is evil and you should cut credit card into two piece unless you has very good money management skills. Pay on time debt before at the end of each month. Never use credit card only for point system.
3, Holiday 0 interest package.
Have you hear and be promoted 0 interest rate to buy holiday package? Recently, I read news and Australian couple can not get refund from oversee holiday package due to covid 19. Some traveling company even bankrupt.
4, furniture and electricity goods for 0 interest
For me, it look like trap and just promote consumer debt. If you can not pay now, How can you afford to pay 2 years time?
5, Luxury clothes and jewellery, watches.
Your true value is never depend on luxury designer clothes and jewellery. The truth is Ordinaries millionaire just everywhere. Sometimes, they must wear normal clothes. Can you believe that Warren Buffet still live in same house 50 years ago. Nothing change for his materials requirements for his clothes, car and house. He must enjoy money games. He regard himself as artist and not purely businessman. Let us use the interesting quote to finish all article. Rich is live like poor and poor people live like rich. There is difference between two.
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