Always bad? No. There are few people who could afford to buy a home, get a degree or start a business without a big chunk of debt. There is definite room for debt in the lives of most Gen Ys.
Often debt gets categorised into “good” and “bad” definitions. The fact is, though, that almost any type of debt can be good for you and any type can be bad. Let's look at a few so-called “good debt” examples.
● Investment debt: That's good, right? Buy an investment property, put in some tenants, claim all the costs as a tax deduction (thank you self-interested politicians). But investment debt can still be bad if you have paid too much for the asset or have overextended yourself.
● Education debt: Improve your qualifications, get a degree, launch yourself into the workforce. Smart – provided you haven't chosen an expensive course that sounds impressive but signifies nothing.
● Home loan: I definitely support people buying their own home. It's terrific for enforced saving and helps you build up an asset base. Again, though, it's a debt that can turn bad if you have overextended yourself.
So most debts can be either good or bad. Credit cards and similar are perhaps the only non-redeemable debt out there, mainly because of the cost. The message is don't worry about how something is going to be funded as much as whether the purchase is a good idea in the first place.
> Justine Davies is finance editor and commentator with financial research and ratings firm Canstar.
GEN X - Bruce Brammall
You're pulling my leg, right? You're asking me, Debt Man, whether debt is evil?
Debt, like greed and Miley Cyrus, get bad reputations in times of crisis. Thanks to Gordon Gekko and Wall Street, greed got it in the 1980s stockmarket crash. Debt copped it more recently with the Global Financial Crisis. Miley's problems started with Billy Ray.
But here are some facts.
Without debt, Gen Xers could neither buy homes, nor investment properties. Without debt (credit cards), we'd have to carry wads of cash and visit banks on a daily basis. Starting businesses would be impossible without debt.
Understand this: Debt is a tool. Used correctly, it can play an important part in creating long-term wealth. But used by the financially reckless, debt can be a deadly weapon (as can cars, golf clubs and Susan Boyle CDs).
Plenty claim debt is evil – if you want something, you should save for it, they say. And that's generally right about consumer goods, cars and holidays. But for a house? Seriously? No-one can save their way to a home ... unless they want to live in a slum in Delhi. Or on a caravan site in Nowheresville. Or they have an inheritance come in early.
Debt is almost a quintessential part of Gen Xers' lives.
Sure, debt is also a four-letter word. But if debt is nasty, then talk dirty to me, baby!
> Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and principal adviser with Castellan Financial Consulting.
BABY BOOMERS - Mark Bouris
When you're talking to my generation, you're talking to people who were raised to actively seek one major debt in their lives – a mortgage – and to minimise all other debts.
So, yes, debt is a bad four-letter word when you burden yourself with consumer debt such as a credit card or store finance and keep it outstanding for the long term. Like if you have a credit card at 18 per cent interest, with a $5000 balance. It will take 33 years to pay it off, with interest of $12,181.
This kind of debt is eating into many young people's finances and their futures. It's hard to save a deposit for a house when large amounts of monthly income are servicing this bad debt.
But a mortgage is another story. In Australia, a home loan is always the lowest-cost debt that a consumer can raise.
My generation sees this as good debt because it is not only low cost, but over the long term it buys a hard asset such as a house, property or unit. It's something you can live in, rent or sell for a capital gain.
One of the concerns with debt is that since the mid-1990s, the debt-to-income ratio of Australian households has basically doubled. However, during this same period household net worth has risen from 450 per cent of household income to more than 600 per cent.
So this gives me hope that the rising debt is largely being used to fund housing.
Debt isn't a dirty word – but bad debt certainly is.
> Mark Bouris is executive chairman of wealth management and advice firm Yellow Brick Road.
RETIREES - KERRIN FALCONER
Debt is mostly a four-letter word for retirees, mainly because there is now no regular income in the form of wages or salary.
Any income comes from investments, some form of pension payments or a combination of both. But – and this is a big but – debt in retirement is a bit like sugar. Too much sugar can play havoc with your health. Too much debt can make a mess of finances. Too little sugar can cause lack of energy and too little debt can create cash flow problems.
The trick is knowing how much sugar, and debt, you can cope with. Not only that, you need to know what sort of sugar and debt it is.
Almost all forms of debt for retirees (home loans, hire purchase, credit and store card debt) are the equivalent of a block of chocolate. Only to be eaten sometimes, and in small and manageable pieces. While providing a taste sensation, it needs to be worked off as quickly as possible. Only then is it worthwhile.
Investment debt is a whole other scenario. There will be those retirees who have the wherewithal and knowledge to carry investment debt into retirement – usually business, property and shares. In most cases it will be backed by a large asset base that provides sufficient income, not only for everyday living but also for servicing the debt.
This is not for the faint-hearted and is not without considerable risk. Any retiree contemplating a sugar hit of this variety needs knowledge, awareness and expert advice.
> Kerrin Falconer is a finance writer with 15 years of financial planning experience.