Do you have too much debt?
It's a question that is normally considered too rude for polite conversation, but according to a report in the Australian Financial Review, it might have to be asked regardless.
According to the report, the Reserve Bank of Australia (RBA) has determined that the level of household debt to income has exceeded 190% for the first time. Not only that, the level of housing debt to income has also spiked to an all-time high of more than 140%.
That means that on average people have nearly twice as much debt as income.
Now sure, a lot of this debt is attached to the family home (aka a mortgage). And that's ok, because house prices always go up…. right? Well, so far this has been mostly true – the Aussie housing market hasn't seen a significant crash in decades.
But what about other debts?
I personally like to divide debts into 'good debt' and 'bad debt'. The trick to keeping debt from impacting on your overall wealth is simple in my view – have a sustainable level of good debt and avoid bad debt at all costs.
The difference between good debt and bad debt is simple. If you have borrowed money to buy a depreciating asset (something that loses value over time), then its bad debt. This includes personal loans, car loans and anything you put on your credit card and don't pay off.
Some examples of good debt might include your home loan, HECS/HELP debt and a loan for an investment property or shares.
If you take anything away from this, take a look at your own personal balance sheet. If you have large amounts of bad debt, or you are struggling to meet your minimum payments from any debt – good or bad – you might have a problem.
And if you have a lot of bad debt, even if it's just from using Afterpay Touch Group Ltd (ASX: APT) or another buy-now, pay-later service, I would humbly recommend getting it out of your life as soon as possible.
Too much debt of any kind can take away from your capacity to build wealth and have a comfortable retirement. Always remember that your debt is someone else's asset, so the sooner you stop making them richer, the sooner you can focus on yourself!
