With interest rates on the rise, although we have recently seen CBA reduce their fixed rate which is generally a good indicator that we might get some reprieve on our interest rates, debt has become a large talking point.
I have had a few people over the last couple of months talk about salary sacrificing vs. paying down debt. Some are already salary sacrificing, and thinking of stopping, to pay debt whilst others are putting everything into their debt.
The interesting part of this conversation is home loans are actually considered “good debt.”
So, what is good debt and what is bad debt?
Good debt is lower interest loans on appreciating assets, whereas bad debt is generally higher interest loans on depreciating assets. Simply put it’s a mortgage vs. credit cards, car loans, etc.
Good debt will build your assets over time, as your assets are ideally outgrowing the interest on the loan.
If you have a high-risk investment tolerance, you will actually find it can work out quite well to utilize your good debt to invest money into shares, more property, etc. But that’s a whole other topic.
My most common conversation is utilizing salary sacrificing rather than paying down that good debt. To be fair, ideally, it is a mix of both.
Salary sacrificing is pretax dollars that are invested in a tax concessional environment, so can usually put you in a better position, at retirement, than becoming debt-free earlier.
This is obviously a very high-level observation, as you will need to consider cash flow issues too, and you should definitely seek financial advice from an advisor before doing either.
As always feel free to reach out for a chat about it all.
I can actually do projections of the different scenarios to see where you should end up in 10-20-50 years.
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