Good Debt

In a nutshell

When you borrow money for the purpose of investing it so that you can make more money. You just need to make sure the return from the investment will be more than the interest you’ve got to pay on the loan.

In more detail

When you hear the word ‘debt’ you instantly think of something negative – and so you bloody should. Bad debt can be crippling and should be avoided like a date with George Pell. But debt can be good for you and used as a tool for creating wealth.

You see the more money you have, the easier it is to turn that into even more money. But what if you don’t have any of your own money to start with? You borrow someone else’s. Borrowing to invest is much more common that you realise – it’s essentially what a home loan is after all. You’re borrowing money from the bank to buy a house, with the expectation that the house will grow in value and end up being worth more. You can apply this to investing in shares as well with what’s called a margin loan, where you borrow money to put into the sharemarket. The key of course is to be making more money from the growth of your investments than what you’re paying in interest on the loan. 

For example: let’s say you take out a loan of $10,000 to invest in shares and the interest rate is 2%. That means you’ll be paying $200 each year in interest. If you invest that $10k into a mix of shares that after one year have grown on average by 8%, then the value of your portfolio will be $10,800. If you wanted to call it quits after 1 year, you’ll have to pay back the original loan of $10k (this is called the principal), plus the interest of $200, and you’re left with a handy $600 that you’ve created out of thin air. 

Mic drop: that’s good debt doing it’s thang.