Talking about debt is embarrassing for many Australians. Yet, we hold some of the highest levels of personal borrowing worldwide, according to OECD figures.
The ratio of household debt to income reached 212 per cent in 2015, meaning the average individual owed more than twice what they earned that year. Only Denmark, the Netherlands and Norway ranked higher.
But debt shouldn’t always be seen as a dirty word. There is a huge gulf between what constitutes ‘good’ and ‘bad’ debt. Spending thousands of dollars on your credit card for luxury holidays isn’t usually advisable, while investing in your dream home can be shrewd financial planning for the future.
Here are four ways you can use debt to build wealth (although be sure to check with a financial adviser to identify the best money management approach for you).
Property prices across Australia’s capital cities increased 11.1 per cent year on year as of May 2017, with Sydney and Melbourne the biggest gainers. While the market has slowed somewhat over recent months, the upward trend in home values over time is undeniable.
Buying a property is a huge investment that shouldn’t be taken lightly, but you can rest assured that most real estate becomes more valuable as time passes, unlike technology, vehicles and other depreciating assets.
You can always reduce your home loan debt by saving up for a bigger deposit before buying, and homeowners can also make significant savings on their mortgage payments in today’s low-interest environment. Rentvesting is also an option for younger buyers who want to get on the property ladder as early as possible while still having flexibility over where they live.
People with bachelor degrees earn approximately $1.2 million more during their lives than those who left school after Year 11.
Dun & Bradstreet (D&B) figures show that more than 62,000 businesses were set up in the third quarter of last year. Sadly, over 15,100 organisations failed over the same period.
The most common reason for a small business to shut down is poor cashflow, according to Australian Securities and Investments Commission data. It’s not difficult to see why when D&B stats also reveal that large businesses pay invoices 20 days late, on average, to other organisations.
The upshot of all these numbers is that starting and maintaining a business is tough, and you are likely to need a commercial loan to get you through those early days while you grow a loyal customer base. Hopefully, this initial debt can help you build a stronger financial future for you and your family as your business prospers.
Pursuing higher education has proven to be an excellent way to build greater wealth over a lifetime.
In fact, a report from the National Centre for Social and Economic Modelling at the University of Canberra found that people with bachelor degrees earn approximately $1.2 million more during their lives than those who left school after Year 11.
There are various forms of financial assistance for those looking to further their education, including the Higher Education Loan Program (HELP), Trade Support Loans and grants. Many have favourable interest rates and repayment schedules, while others may not need paying back at all.
Although your mortgage isn’t ‘bad’ debt, it’s not always the most efficient way to borrow against a property.
We’ve already covered real estate investment, but even though your mortgage isn’t ‘bad’ debt, it’s not always the most efficient way to borrow against a property. After all, a home doesn’t typically generate income and interest repayments may not be tax deductible.
Debt recycling can solve these problems. Essentially, you use the equity from your mortgage to finance an investment loan, which goes towards income-producing assets such as shares and managed funds.
— happy-is (@happydashis) October 14, 2015
Any returns (plus tax savings) are used to pay off non-deductible debts within your home loan. You then increase your investment loan by the amount paid off in order to boost your asset portfolio further and continue the process. However, it’s important to realise there are risks associated with this approach, so make sure to discuss debt recycling with a financial adviser before proceeding.
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