Real Estate Investor Magazine South Africa September 2015 | Page 20

COVER STORY EXAMPLES OF GOOD DEBT Good debt is generally debt that attracts a tax deduction because it has been used for a tax-deductible purpose such as acquiring an incomeproducing asset like a rental property or shares. If you are on the top marginal tax rate the tax deduction will, in effect, halve the interest rate. In our current low interest rate environment that may not sound like much but it has a dramatic effect over the longer term. Mortgage bond debt Mortgage bond debt typically falls under the “good” debt category because it helps you maintain a strong credit history and there are tax benefits for your investment, which can be taxdeductible. Your house is also an asset that can appreciate over time and real estate ownership helps you build wealth. 
 
 Of course, real estate prices don’t always rise. So even though mortgage debt is usually considered “good debt,” avoid signing for a mortgage that you can’t afford. That would make a “good” real estate loan a decidedly “bad” deal. Your Education Your education is considered “good debt” because they often have low interest rates, they may be tax deductible, and they’re an investment in your future earnings. Over a lifetime, the typical college grad will earn $1 million more than the average high school graduate, according to the U.S. Labor Department. Cost of Business Many business owners avoid large real estate investments by renting or leasing their facilities. Other small businesses that own their own buildings, land or equipment can turn equity into cash by mortgaging the property to the bank, commercial finance company, savings and loan organization or insurance company of Bad debt. EXAMPLES OF BAD DEBT While even “good debt” can have a downside, certain debts are downright bad. Items that fit into this category include all debts incurred to purchase depreciating assets. In other words, “if it won’t go up in value or generate income, you shouldn’t go into debt to buy it.” Some particularly notable items related to bad debt include: Credit card debt Credit card debt often falls under the “bad” debt category because you never earn a return on your purchases. In fact, making only minimum payments can lead to more debt (i.e. interest) over the long-term. 
Credit cards typically have higher interest rates than mortgage bonds, and carrying a lot of credit card debt can also lower your credit score. Credit card debt is also not tax-deductible. Car loans Car loans are usually regarded as “bad” debt mainly because the value of a new car depreciates immediately once you drive it off the showroom floor. Put your ego aside and pay cash for a used car, if you can afford to do so. If you can’t, buy the least expensive reliable vehicle you can find and pay it off as quickly as you can. Clothes, Consumables and Other Goods and Services It’s often said that clothes are worth less than half of what consumers pay to purchase them. If you look around a used clothing store, you’ll see that “half” is being generous. In addition to clothing, vacations, fast food, groceries and gasoline, these are all items commonly bought with borrowed money. Every penny spent in interest on these items is money that could have been used more wisely elsewhere. 18 SEPTEMBER 2015 SA Real Estate Investor www.reimag.co.za