It’s OK to face up to your fear of debt
DEBT has been used as a tool to create wealth by most of the world’s richest investors, yet many Australians are afraid to take on debt beyond their mortgages, credit cards and personal loans.
Investment debt carries risks, but rewards are there for those who use it wisely.
For example, if you invest $20,000 for three years and enjoy 8 per cent annual returns, your wealth grows by more than $5000. But if that $20,000 is combined with $80,000 of borrowed money, it increases your wealth by almost $26,000, before tax-deductible borrowing costs.
But if the investment loses value by 8 per cent each year, you are left with more debt than asset – this is known as negative equity and scares many people.
Rise High Financial Solutions director Marissa Schulze said it was normal to be afraid of the unknown.
“Many people have a fear of debt and this is often the main reason that holds them back from achieving their financial and lifestyle dreams,” she said.
“Taking on additional debt puts most people out of their comfort zone.”
Ms Schulze said people could control fear of investment debt by surrounding themselves with trusted advisers, being realistic about finances and future goals, protecting themselves with insurance, and weighing up fear of debt against their fear of not being able to retire as they want.
“Most Australians, if they carefully examined their financial position… would realise that they will either have to work much longer than they would like or accept a much lower quality of life in retirement.”
Wealth on Track principal Steve Greatrex said credit card debt was “uncool, but debt linked to an asset that’s growing over time is generally OK”.
Mr Greatrex said while many Australians were comfortable taking on debt to invest in real estate, “it’s quite different when you get into the share side of things”.