I have seen firsthand how debt can impact individuals and their financial goals (just listen to my personal story in my podcast episode to understand more). One common question that clients often ask me is about the difference between personal debt and investment debt.
Personal debt is typically associated with everyday expenses, such as credit card debt or personal loans. Some refer to personal debt as ‘bad’ debt as it’s usually created with very little to show for it at the end (i.e. consumer spending).
It is often created through spending more than you earn or buying something on impulse (or lots of things over time!) This type of debt is also often used to cover unexpected expenses, such as medical bills or car repairs, or to fund purchases that are beyond an individual’s immediate means. Personal debt can soon increase if you don’t have a savings account set aside for those unexpected emergencies or expenses and even the most savvy saver can be caught out with a life event that soon throws you into debt.
Investment debt, on the other hand, is used to finance an investment that has the potential to generate income or increase in value over time. This could include investments in property, shares, or other assets that have the potential to generate returns. It is often referred to as ‘good’ debt because it is debt that ultimately has the aim to create financial freedom or returns on investment.
The key difference between personal and investment debt is the purpose for which the debt is taken on. Personal debt is typically used to cover short-term expenses, while investment debt is used to fund longer-term investment strategies.
It is important to note that both types of debt come with risks. Personal debt can quickly spiral out of control if it is not managed carefully, while investment debt comes with the potential for losses if the investment does not perform as expected. There is no such thing as guaranteed when it comes to debt and investment.
When considering taking on debt, it is important to have a clear understanding of your financial goals and the risks associated with the debt. It is also important to work with a financial advisor or mortgage broker to ensure that you have a clear plan in place for managing the debt and minimising any potential risks.
In some cases, taking on investment debt may be a viable strategy for achieving long-term financial goals, such as building wealth or generating passive income. However, it is important to understand the risks and to have a solid plan in place for managing the debt.
In conclusion, personal and investment debt are two different types of debt that serve different purposes. As a mortgage broker, it is my role to help clients understand the potential risks and benefits of taking on debt, and to assist them in making informed decisions that align with their financial goals.
Book a call with me today to learn more about how good debt can be used in your situation.