Ever splurged on a brand new piece of tech and put it on Afterpay? Or what about a HECS loan from the Government to cover your uni fees?

Well, these are both examples of debt. 

Sometimes debt is necessary... but other times, it can get you in a bit of trouble.

Let’s break it down.

What is debt?

Put simply, a debt is an obligation that requires someone (aka you or me) to pay back money that they’ve borrowed from someone else.from someone else (aka a bank or lender). 

People take on debt for a bunch of different reasons, like to buy a house, a car, to pay their uni fees.

Some of this is good debt…and some of it is bad debt.

What is good debt?

Debt can be considered ‘good’ if it helps to earn you money. Ie. if it is used to buy something that will grow in value over time, or provide you with another income. 
Examples of good debt:

• A HECS loan: University degrees can help increase your earning potential
• A business loan: These loans can help businesses expand which will in turn improve your wealth.
• A home loan: property has historically increased in price over time

And what is bad debt?

Debt can be considered ‘bad’ if it won’t earn you any money, or it is used to buy assets that fall in value. 

So, taking out a credit card or personal loan to fund a new wardrobe or a holiday lives in this category. 

‍So should I avoid bad debt?‍

The truth is, bad debts like credit cards don’t have to be bad (but generally they are!). If used responsibly, credit cards can help manage cash flow, budget and pay for emergencies without dipping into our savings.

But they also make it very easy to spend above your means. You need to ask yourself if using bad debt like a credit card adds value to your financial wellbeing or worsens it

How can I get rid of debt? 

If you have some debt you want to start paying down, you can:

• Write a list of all the debts you owe
• Order them in terms of priority (generally it’s best to start with the debts that have the highest interest rate)
• Look at your day to day budget and allocate an amount that you can realistically pay off each week 
• Find a friend or family member to keep you accountable - maybe you can keep them accountable too
• Start paying your debt down!