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Get Out of Debt

17.09.2008Good versus bad debt

The key to being smart with your money is learning to differentiate between good and bad debt.


By Jill Fraser

If I had followed my grandfather’s mantra, “never live in never-never land”, I wouldn’t own a house, I wouldn’t have purchased a car until I was in my early 30s and that overseas trip I took at age 20 may still be on my wish list.

My grandfather’s view was unrealistic.

The ‘buy now, pay later’ mentality is now an inextricable part of the social fabric and if used wisely (okay, so the trip probably doesn’t fit that criteria) it can be a valuable tool to attain assets and build wealth.

But since the advent of the credit card in the mid-70s, consumers have becoming increasingly reliant on plastic money. Strong marketing of credit cards by financial institutions has certainly helped the cause.

Credit card debt in Australia has topped $44.7 billion and the level of household debt is now 160 percent of disposable income (it has doubled in the past decade).

So is all debt a dirty word?

Dr Doug Turek, managing director of the wealth management company, Professional Wealth looks at the issue of debt in terms of a hierarchy.

Pointing out that debt is an enabler for companies to grow their businesses and individuals to expand their wealth (such as buy a home), he says that the problem starts when people take on too much debt or use it for improper purposes such as consumption.

Turek’s “hierarchy of debt” begins with “good debt”, which is debt used for productive purposes such as borrowing to invest, where other people’s money is used to grow your wealth.

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