In the game of wealth-building, debt isn’t the villain it’s a lever. Use it wisely, and it propels you forward; misuse it, and it drags you down. As someone who’s navigated the financial trenches, I’ve seen how the right kind of debt can turn ordinary folks into empire-builders, especially for people who have surplus cashflow. At Tenex Wealth, we serve clients across Australia, but our roots in Newcastle give us a front-row seat to how debt when sued correctly can be a superpower.
This isn’t financial advice, it’s food for thought to help you think deeper about your money moves.
Think of debt like fire: harnessed, it cooks your meal, provides warm in cold winter months. However, if left uncontrolled, it burns the house down. The key? Discernment. Good debt builds empires while bad debt erodes them. Let’s break it down.
Debt That Builds Your Future (Good Debt)
What is good Debt?
Good debt is the kind that pays you back in the long run, firstly with interest or more formally a tax deduction. Good debt essentially is any debt that you have acquired to purchase an income producing asset. This most commonly includes property, a share portfolio or a business. In Australia, where tax laws reward smart investors, good debt amplifies your returns without just haemorrhaging your cashflow as you can claim a tax deduction against your income.
Let’s walk through this step by step for an Australian resident earning $135,000 in salary. We’re focusing on the investment property purchased for $750,000 with $600,000 in debt at a 5.5% interest rate, generating $26,000 in annual rental income.
Actual tax reduction hitting your pocket: You pay $31,288 without the property vs. $29,188 with it, so the reduction is $2,100 in income tax owed (or refunded via negative gearing).
Summary Table
| Aspect | Without Property | With Property | Difference (Benefit) |
|---|---|---|---|
| Taxable Income | $135,000 | $128,000 | -$7,000 |
| Income Tax Payable | $31,288 | $29,188 | -$2,100 |
| Effective Marginal Rate | 30% | 30% | N/A |
| Net Pocket Impact | N/A | N/A | +$2,100 (tax saved) |
The magic? Tie it to appreciating assets or income generators. Australia’s tax system sweetens the deal interest on investment loans is often deductible, per the ATO. A Key Tip may be to keep leverage below 70% of the total asset you have purchased. This will ensure that your cashflow can keep up with the expenses and allow you to not a forced seller of any assets if your personal circumstances were to change.
Secondly, the leverage of good debt allows you to amplify gains.
Leverage is the secret sauce that turns good debt into a wealth accelerator, it’s like strapping a rocket to your investments. Warren Buffett nailed it when he said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” In the context of our $750,000 investment property, with $600,000 in debt and your initial $150,000 equity stake, let’s see how leverage supercharges that compounding at a steady 5% annual growth rate.
Without leverage, you’re just compounding your $150,000 equity directly at 5%, solid, but pedestrian. With leverage, the entire $750,000 asset grows at 5%, and your equity rides the full wave (assuming the debt stays constant, like on an interest-only loan). The result? Your gains are amplified because you’re benefiting from growth on borrowed money.
Here’s the breakdown over 20 years, showing the equity value in both scenarios:
| Year | Leveraged Equity (Growth on $750k Asset – $600k Debt) | Unleveraged Equity (Growth on $150k) |
|---|---|---|
| 0 | $150,000 | $150,000 |
| 5 | $357,211 | $191,442 |
| 10 | $621,671 | $244,334 |
| 15 | $959,196 | $311,839 |
| 20 | $1,389,973 | $397,995 |
See the gap widen? After 20 years, leverage delivers over $1.39 million in equity, nearly 3.5 times the unleveraged path.
Of course, a caveat: Leverage cuts both ways. If the property value drops 5% a year instead, your losses get magnified too potentially wiping out equity faster than an unleveraged position. Always keep that 60-70% loan-to-value ratio in mind to buffer against downturns and protect your cash flow.
Debt That Doesn’t Align With Your Goals (Bad Debt)
Bad debt? It’s the silent thief, stealing your future one interest payment at a time. Not because it’s evil, but because it’s aimless. In the Australian landscape, where credit is easy, but wisdom is hard-earned, bad debt often masquerades as convenience. Bad debt is essentially any debt that does not buy asset’s, they buy liabilities. An easy way to tell the difference is if the asset produces income or not?
Common traps:
- High-interest consumer debt: Credit cards or personal loans for impulse buys. That new gadget? It depreciates faster than you can say “interest compounding.”
- Loans for depreciating assets: Financing a car, boat, jet ski, caravan, that loses half its value in years. Fun in the moment, but it leaves you poorer long-term.
- Unplanned borrowing: No strategy, no exit plan. It piles up, eroding wealth and can often lead you a decade behind with the wrong choice.
- Family home: This one will get a stir. But it’s bad debt. A family home is a lifestyle asset and should not be considered a financial asset in my opinion. Its 30 years of repaying the bank, it’s now cost you double what you paid for it but more importantly it’s sucked up the majority of your income each year for those 30 years. Don’t get the lifestyle creep. If you want to be poor, having a house on a large mortgage is the ultimate way to keep you there.
Expand Your Property Empire Without Selling (Equity)
Equity can be your hidden goldmine. A common strategy that a lot of people will use is to unlock equity in their family home as it has appreciated in value, or the loan has been paid down. However, note that your new investment property, share portfolio now has 100% leverage and often times more as you have borrowed the stamp duty and legal fees. Leaving you extremely susceptible to the market going the other way. Please consider the cashflow impacts with 100% debt on any asset.
Keeping Every Element Working For You
At the end of the day, debt strategy boils down to alignment: Is it purposeful? Efficient? Tailored to your life? We at Tenex Wealth craft plans that ensure:
- Every borrow serves a goal.
- Structures leverage with enough cashflow buffers to utilise leverage safely.
- Reviews keep it adaptive because markets, like life, evolve.
Debt isn’t good or bad it’s what you make of it. Think like a philosopher, act like an entrepreneur, and watch your wealth compound. For more insights on debt management in Australia or financial advice in Newcastle, explore our resources at www.tenexwealth.com.au. Remember, this is informational only, consult a professional for your situation.