Smart Way #51: Not all debt is bad – smart debt can make you wealthy

While there are some forms of debt that can be used as stepping stones to greater things, debt incurred by impulsive purchases sets you back. Usually, using a credit card is the issue. However, if you are responsible and pay the whole amount off monthly, that same card can lead to a favourable credit and payment history. The key is to differentiate between smart and ‘dumb’ debt.

A student loan can be a smart debt if your qualification leads you into career opportunities. But beware! Spend that loan on necessities, not optional extras.

When buying a car, put down a good deposit then pay the remainder quickly. Don’t take out a five-year loan on a car that will only last three years! This would qualify as a dumb debt.

The most popular form of smart debt in New Zealand is still a mortgage, provided your mortgage repayments aren’t going to cripple your monthly budget. This can easily happen if mortgage interest rates rise.

Lastly, business loans to buy or expand your business can be incredibly smart… or dumb depending on the business. Less than half of business last for five years, and only a third make it to 10 years. Additionally only 10% of business partnerships last! In summary, choose debt that invests in long term benefit, not short-term satisfaction.