When used wisely, debt can be a powerful tool for building long-term wealth.

Understanding the Difference: Good Debt vs Bad Debt

It’s crucial to understand the difference between good debt and bad debt.

• Good debt is used to acquire assets that have the potential to increase in value or generate income — think investment properties, share portfolios, or business assets.
• Bad debt, on the other hand, is used to purchase items that don’t grow in value (and often depreciate) — like cars, holidays, or personal items bought on high-interest credit cards.

Key takeaway: Good debt helps you build wealth; bad debt drains it.

1. Build Wealth with Property

Property investing is one of the most common ways to create wealth using debt.

If the property grows in value, you benefit from capital gains. At the same time, if it’s rented out, you earn rental income — which may cover your loan repayments.

You’re essentially using the bank’s money to buy a growing asset, while your tenant helps pay it off.

Interest on investment loans is usually tax-deductible, making property even more attractive for wealth creation.

2. Build Wealth with Shares

Another way to build wealth with debt is by borrowing to invest in shares, known as margin lending.

If the share market rises, your returns are amplified. This allows you to grow your investment faster than you could using your own funds alone. However, this strategy comes with higher risk — if share prices fall, your losses are also magnified.

3. Use Equity to Grow Your Property Portfolio

If you already own property, you may have equity — the difference between your property value and what you owe on it. Many people use this equity as a deposit on a second property or to invest in shares or other income-generating assets.

This approach is ideal for those who want to scale their investments using existing assets.

4. Tax Advantages of Investment Debt

Interest on loans used to invest in income-producing assets is generally tax-deductible. This applies to:

• Investment property loans
• Margin loans for shares

These deductions can significantly reduce your taxable income, boosting your net return on investment.

Final Thoughts: Smart Debt Builds Wealth

Using debt to build wealth can grow your net worth over time. However it is important to speak to a professional such as a financial adviser or mortgage broker.