Taking on debt is an inevitable part of investment planning. Whether it’s to pay for your child’s education, make a down payment on a car, or take out a mortgage for an apartment or house, debt is a necessary part of most people’s financial future (and, even some of the wealthiest people among us still leverage debt to support their investments.)

So then, if we have to go into debt, how can we make smart decisions and ensure its good debt, and not bad debt that we’re taking on?

Good debt is defined as an investment that will grow in value or generate long-term income. By comparison, bad debt is any type of debt incurred that will lose its value quickly, or that will not generate future income. These types of debts will often drain your wealth, are not affordable long-term, and offer no prospect for generating a return on the debt in the future.

When it comes to good debt, there are ways to ensure you’re making smart financial decisions. For example, taking out a student loan to pay for education is a great example of good debt. This is because the interest incurred from a student loan is often at a much lower rate compared to others types of debt. Additionally, post-secondary studies are a solid way to ensure you will be able to generate a higher rate of income in the future, thus producing a tangible return on your investment in education.

Taking out a mortgage to buy a home is usually considered good debt as well. Like student loans, home mortgages generally have lower interest rates than other debt, plus that interest is tax deductible. Even though mortgages are long-term loans (30 years in many cases), those relatively low monthly payments allow you to keep the rest of your money free for investments and emergencies. The ideal situation would be that your home increases in market value over time, enough to cancel out the interest you’ve paid over that same period.

Remember: Eliminating bad debt should be a priority when aiming to achieve financial independence. Before taking out debt, make sure you have a clear and realistic plan for paying it back, through a series of regular and affordable payments. For more information or for a free consultation about your debt requirements, contact the experts at SRG Finance today: srgfinance.com.au/contact/.