Nick Lockhart’s DEBT Series; Part 5: “Tolerable Debt”
In last weeks fa@mrd we looked at HORRIBLE DEBT. This week, we will continue our debt series by looking at the 2nd types of debt…
TOLERABLE DEBT
We have now established that HORRIBLE DEBT describes the type of debt that does NOT attract any tax deduction… and is used to purchase things that go down in value; typically consumer… or credit card debt.
TOLERABLE DEBT as the name implies, is not all bad… but neither is it all good! Put simply, TOLERABLE describes that type of debt that (as with Horrible) will NOT attract any tax relief, but is used to purchase appreciating assets… things that go UP in value.
Typically, tolerable debt is used to buy the family home (appreciating art could also fall into this category). Most of our industry peers and analysts tend to put all debt into one of two categories… good debt and bad debt; where the family home is considered bad debt. WE STRONLY DISAGREE WITH THIS VIEW… and while acknowledging that the family home is not good debt… neither do we believe it’s fair to put it into the same category as credit card debt for that new plasma screen television. The family home will at least go up in value (historically well located residential real estate close to services & infrastructure doubles in value each 7 year, on average). Even without any taxation advantages that is still not to be sneezed at… and while you may have not made a real profit after allowing for repayments and overheads, you would have had to pay for a roof over your head anyway.
Ironically, Australians continue their ‘love affair’ with debt… completely about face!
We embrace and commit to far too much Horrible debt…
then have a tendency to take on a little too much Tolerable debt…
then fearfully shun or at least embrace far too little Productive Debt… the only sort of debt that qualifies to be called a ‘friend’.
Next week, our friday afternoon @ mrd will focus on the sort debt that we (personally) want more of, not less…
…this is the type of debt that is essential to somebody looking to create wealth… as indispensable as a paintbrush is to a painter…Yes… PRODUCTIVE DEBT!!
Happy Investing,
Nick Lockhart
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