Good and bad debt

Jeremy Tauri.

We seem to spend our lives being told to pay off our debt faster, take less debt on and generally avoid having it hanging over our heads. But sometimes debt can actually be a good thing.

The key is to be able to identify whether debt you are thinking about taking on is "smart" or "dumb".

Debt is smart if it puts you in a better financial position. That could mean boosting your earning power, giving you new opportunities or even improving your health. If you are borrowing to grow a business, invest or to upskill, this can be smart debt.

If borrowing $10,000 for your business now allows you to invest in marketing, say, and increase the number of clients you deal with, it could quickly pay itself off. Soon, you'll be in a better position because of that initial investment.

You can find examples of smart debt in your personal life, as well.

If you have kids thinking about going to university, a student loan could very well be smart debt for them. It seems an unimaginably huge amount of money at the time, but if borrowing $20,000 gives your kids the chance to earn a third more throughout their working lives, they will be better off in the long run.

Or if you have a house that is drafty and cold, borrowing to install insulation could be a good idea because it will help you be healthier, cut your power bills and reduce your time off work.

Dumb debt is the type that you rack up on a hire purchase for furniture, or giving your credit card a workout at the pub. It does nothing for you in the long-run, except drain your ability to invest in more sensible ventures.

This kind of debt can be a ball and chain permanently dragging you down. Get rid of it as fast as you can and resolve never to get back into it again.

Give some thought to what kind of debt you have. It has a bad reputation but, used wisely, it can give you a big boost in business and in life.

- Jeremy Tauri is an associate at Plus Chartered Accountants.