Is all debt bad? What’s the difference between good and bad debt?

All bad? Hell no! Stupid question! Are you bat-crazy, like Kanye West? Or just out-of-your-mind, like Charlie Sheen?

Seriously? How can all debt be bad? If you’re not convinced, ask yourself the following simple question: “Who could buy their first home without debt?”

A tiny fraction of 1 per cent. Got me? Only an absolutely elite form of moron would claim that all debt was bad. But that doesn’t mean that all debt is good.

This whole notion of good/bad debt just aint right. There are actually three types of debt – dumb, okay and great. You separate them by their answers to the following two questions. Is the debt tax deductible? Will the purchased asset increase in value?

If it answers no to both, it’s “dumb” debt. Pretty much credit card debt, most car loans, plus anything you buy on credit at a store.

If it answers yes to one, but not both, it’s “okay” debt. For instance, your home loan is not deductible, but the home should increase in value. Work cars are partly deductible, but will decrease in value.

“Great” debt answers yes to both – it’s both a tax deduction and the asset should increase in value. This is investment debt, such as to buy property or shares.

Debt makes the world go round. You can’t survive without it. Well, you can, but you can’t financially thrive without it. And using it wisely, to help you purchase a home and quality investment assets, is actually how people create real wealth.

But what else would you expect from the guy who wrote Debt Man Walking?

Bruce Brammall is the principal adviser with Bruce Brammall Financial (www.brucebrammall.com.au) and author of Mortgages Made Easy.