Andrew Knight

You may have heard the expression “there is good debt and bad debt” and this is a very true statement but do you question what is good debt and what is bad debt? That’s something I’m answering today, helping you understand simply the importance of both and how it affects your finances and so forth.

Bad Debt

Bad debt can be derived from purchasing liabilities, things that don’t generate an income for you, won’t pay for itself down the long run. A car is a perfect example of this, you take out a loan, pay x amount of interest over 10 years and then you get hit with on road costs, services and other fees - taking money out of your pocket, not putting money in. Don’t be fooled, this can also apply to houses if you don’t do your research. Another example is a credit card, instant money people take for granted without using it properly. Unless you are levering your money using a credit card, you’re actually stacking bad debt onto it, forcing it to work against you like speeding up a timer on a bomb. In order to keep out of bad debt, you need to understand the importance of keeping out of it, making sure you’re ahead of the game, unlike many in society today.

Good Debt

Good debt is utterly important as it opens the doors of passive income to you if done properly. Before banks lend money out to a customer they assess the persons financial status. For example, how much they earn per year, what assets do they own, other sources of income and their credit history. If this strict criteria is met, then it’s a green light to lend and this would be classified as good debt. However, if the bank lent money out to someone who couldn’t afford the repayments on time, had no financial history or income, then they are taking a high risk and it becomes bad debt, much more risk involved.

In order to generate a passive income, you need to purchase assets that will automatically make money for you, however not everyone is born with a million dollars so how do you ‘afford’ these assets? You need to borrow money, leverage it and manage it effectively. Let’s say you found a house, the house was $50,000 and you only had $30,000, you would need to borrow the extra $20,000 to purchase it. Before you do, you need to consider if this will generate more income then the expenditure. So if your loan repayments was $300/week and you were renting it for $400/week, you are making $100/week in passive income, allowing you to pay off the loan much quicker. However, if the house wasn’t paying itself off by its own income, then it would be classified as a liability, something that is taking money out of your pocket and putting it into the banks. There can be exceptions, different investments require different levels of money however, research and planning is critical, making sure your projected income is rock solid.

The more money you put into the house, the faster it gets paid off, the less interest and more profit. This allows you to invest into more ventures by using the equity in the house. This of course applies to all investments and there will always be risk, the idea is to minimise it as much as possible.

The above has been based on knowledge I have learnt from experienced and knowledgeable people such as my Dad and Robert Kiyosaki. Please remember I’m not a financial advisor nor do I ask you to follow my advice, if this ever proves useful, please share it as we all should live in abundance.

Consumerism has hit me hard recently, making me get on my knees and grovel for a popular materialistic item, the iPod Touch - 2nd Edition. Even with our current economic situation with world debt being increasingly high and money dropping in value by the hour, the iPod is still referred to as an liability due to the fact it’s not making me any money and posesses the possibility of breaking down in some way.

I have lost some money surplus by giving in to my feelings which has been invoked by multiple things like incredible marketing. Not to mention, my own desire to hold something which has been beautifully crafted to perfection, with a sleek steel case and a 480×320 touch screen - it’s pure all over.

Pushing that aside, I will now be adding money to a personal fund, details I can’t exactly disclose however I can assure you it’s beneficial to my future and will secure profitable ventures - exciting! I will be removing my saving bar and replacing it with a new bar representing the money added to the fund, named “Success Fund”.

Is this how we are being brought up? Learn how to drive in your parents car, get your license, find the car of your dreams and get a car loan, then spend the next 10 years paying it off. I’m not one to judge, however I do find it intriguing how much we as a nation have changed over the years. Back in the industrial age you would either get your pops truck or work hard and save your money, and then purchase a car in full, most likely it being a used one for your first car. Now it’s sign on the dotted line, get now and pay later with interest, not to mention their hands just inches away from crushing your throat if you refuse or “forget” to pay. Should this be the way, should we teach our kids to have now, before earning it and understanding appreciation?

Personally, I don’t drive as yet however, I see logic in saving up a few thousand to buy your first car out in full. From my readings and understanding, chances are most young adults will “accidentally” forget to pay on time and will get slapped with a hefty bit of interest. Don’t get me wrong, credit in this world is not only needed but it’s important to wealth. I just feel we as consumers rely on credit cards and personal loans too much because we have this mindset of “want now” and as you can see, this has clearly caused trouble.

A car loan would be beneficial if claimed under a business as it would eventually pay itself off. From my point of view, you should only consider applying for a car loan when you have the following Why, What, When and How worked out:

1. Why do you need a car loan? - This is a serious question, think outside the square for a moment.
2. What car loan suits you best? - Many to choose from, find which one works for you.
3. When will it be paid off? - Knowing a rough estimate on when it will gives you a goal.
4. How much interest will you be paying? - 5 years might be easier for you but harder on your pocket in the long run. Think this through.

Most people will act on their emotions - i.e. want now - and not consider their current circumstances. By analysing your situation, how much you can afford and how quick you can pay it off, your removing your natural emotion and starting to think like the rich.

If you need a car loan, I would recommend comparing various car loans to find the best one which suits you. You can do this by visiting http://www.carloan.com.au - you can compare and apply for a car loan online.

UPDATE: Interest Rates have officially been cut by 0.75 percent, leaving the current interest rate at: 5.25%

Where money is being splashed around, being lost and being gained, the Reserve Bank of Australia will be meeting with the focus on cutting interests rates by another 0.5 percent. This of course isn’t certain, only theory by economists not to mention ANZ, CommSec, AMP and Austock’s Michael Heffernan predicting the cut. However, Mark Dutton spoke for most experts suggesting the slow economy would push the RBA into cutting rates between 0.5 to 075 where as Robert Camilleri of Aviva Investments was more optimistic, saying he believed the banks would cut rates by 1 per cent.

An interest rate cut is of course vital in our economy though it’s uncertain how much improvement this can do to the economy, asking questions like how much would rates fall. According to News.com.au, a rate cut of 0.5 percent would would lower payments on a 25-year mortgage of $250,000 by about $85 a month, meaning more money for necessities like groceries.

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Information: News.com.au