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DEBT has been used as a tool to grow 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 grows your wealth by almost $26,000, before tax-deductible borrowing costs.
However, 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 human nature 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 and goals,” she said.
“Taking on additional debt puts most people out of their comfort zone and the fear of the perceived risks associated with overcomitting themselves is too much for most.”
Ms Schulze said people could control their fear of investment debt by surrounding themselves with a team of trusted advisers, being clear and realistic about their finances and future goals, protecting themselves with personal insurance, and weighing up their fear of debt against their fear of not be able to retire when or how they want.
“For most Australians, if they carefully examined their financial position and what it is likely to look like by the time they wish to retire, they 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 if they choose to do nothing.”
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”.
Painful memories from the Global Financial Crisis, when investors who had borrowed heavily to buy shares were stung by lending decisions that wiped out their wealth, are still vivid and make people think twice about using debt to buy shares or managed funds.
Mr Greatrex said a better option could be to use equity in your home. “You have to be careful about your cash flow, and don’t go overboard,” he said.