Good Debt - Bad Debt

There is no doubt that debt is around us to stay. Some of the best sales and marketing people are working for the major banks and as their primary product is debt, and they have budgets to meet, we as consumers will be asked to buy more and more debt.

But how do you determine whether it's good debt or bad debt?

When I was brought up, my parents told me that all debt was bad. Why then do wealthy people have a level of debt? Why do they use the banks money to get ahead rather than saving up all the time? Surely they can't be wrong.

Well, there are three simple rules of thumb for helping you work out if debt is good or bad.
Rule 1 : Is the debt being used to acquire capital which will produce income?
Rule 2 : Is the debt being used to acquire capital that will appreciate in value or depreciate in value?
Rule 3 : Is the interest payable on the debt a tax deductible expense when calculating my income?

Let's take an example.
1. Credit card debt used to buy some new clothes to wear.
The clothes will not produce income, neither will they appreciate in value and it is unlikely you will get a tax deduction for the interest on a personal credit card. This all means that the debt here is BAD
2. Loan taken out to purchase a rental property
The property will produce rental income, is likely to increase in value, and the interest on the loan is likely to be tax deductible. This all means that the debt here is GOOD

These are only examples and you should consult you own professional advice before making a decision.

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