In today’s economic climate, many Australians are grappling with a challenging question: should they focus on paying down debt or consider taking on more debt for spending or potential investments? With interest rates on the rise, the cost of carrying debt has soared, making this decision more critical than ever.

Different approaches to managing debt can lead to vastly different financial outcomes. While some people take on debt to fund a lavish lifestyle, others use it strategically to invest in high-growth assets like property or shares. The key lies in understanding the nuances between good debt, bad debt, and dreadful debt.

The Three Types of Debt: Good, Bad, and Dreadful

Good Debt refers to borrowing for investments that generate positive returns, often with favorable interest rates. In many cases, the interest is even tax-deductible. Loans for investment properties or shares typically fall into this category, as they have the potential to build wealth over time.

Bad Debt usually includes loans with higher interest rates or no tax benefits, such as a mortgage on your primary residence. While your home may appreciate in value, the recent spike in interest rates has made it more expensive to service mortgages. Bad debt can still be managed well, but it requires careful attention, especially when market conditions are uncertain.

Dreadful Debt is the most damaging type of debt, and it’s critical to eliminate it as soon as possible. This includes high-interest, non-deductible debt such as credit cards and personal loans. With interest rates rising, the cost of maintaining dreadful debt has only worsened, making it a wealth destroyer.

Prioritising Debt Repayment

Given the recent economic shifts, it’s more important than ever to have a strategic approach to debt. Tackling dreadful debt should be the first priority, as it erodes wealth rapidly. Once this is under control, focus can shift to reducing bad debt.

For homeowners, if your mortgage is less than 50% of your home’s value, you may consider diverting some cash flow toward building a separate investment portfolio. This can help diversify your wealth, offering liquidity and flexibility in uncertain times.

Adopting a Business-Like Approach to Personal Debt

In business, effective debt management is a critical factor for success. Businesses that skillfully manage their debt tend to thrive, while poor debt management can lead to failure. Yet, many individuals approach personal debt passively, making only minimum payments without re-evaluating their broader financial strategy.

By adopting a business-like approach, you can improve your financial outcomes. This involves regularly reviewing your debts, asking whether the interest rate on each is competitive, and considering whether the original purpose of the debt is still relevant.

The Path Forward: Balance Debt Repayment and Investment

Ultimately, the decision to prioritize debt repayment or investing depends on your individual circumstances. For many, the goal is to be debt-free by retirement, which makes debt management a critical aspect of financial planning. However, it’s important to balance this with the opportunity to build assets through strategic investments.

Craft a long-term plan that includes both debt repayment and investment strategies. Adjust your budget to make room for both, focusing first on eliminating dreadful debt and then reassessing your approach to bad and good debt. By doing so, you’ll be better equipped to navigate rising interest rates while still working toward your financial goals.

A comprehensive financial strategy doesn’t stop at debt management. Take time to evaluate your monthly expenses, identify areas where you can cut costs, and consider ways to accelerate your wealth-building efforts. The sooner you find the right balance between repaying debt and investing, the better positioned you’ll be for financial success.

If you need specific debt advice, reach out to one of the advisers at Cadre Capital Partners who will be able to assist you.