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Taking out loans for a smart investment can pay off in the long run.
July 13, 2021

Getting out of debt with more debt? Yep, it actually works.

Money Management

One of the fastest and most effective ways to get out of your debt is to start earning more money. Of course, that's easier said than done and it can be even harder if you don't foresee a promotion in the near future or other responsibilities keep you from picking up a second (or third) job.

However, it's not impossible. Oddly enough, a powerful strategy you can use to climb out of your current debt might actually be to go into more debt.

What? This can sound daunting and counterintuitive but don't let it scare you away. If you invest your additional capital into the right income producing assets, you could wind up with a much higher income than that which you started. You can then use it to more easily reduce your overall debt.

Here are some of the ways more debt can actually help you pay down your current debt.

Good debt v. bad debt

To start, it's important to know that there are different types of debt. Good debt is the debt you use to acquire income-generating assets, including property, shares and a business. With the right strategy, good debt will eventually pay for itself. Bad debt, on the other hand, is debt for assets that don't generate income. This includes purchases on credit cards, car loans and personal loans. It's good to know these differences to best understand how new debt can actually help you pay down other forms of debt.

Start a business

Lots of people imagine themselves starting a small business and devoting their lives to its upkeep. It's a tried and true revenue-generating investment that can provide entrepreneurs with a steady stream of income for years, if done right. However, starting a business isn't easy, nor is it cheap, and many future owners must dip into at least a little debt before they can get their business off the ground.

If you're starting your business from scratch, you'll need to have the funds to pay for all start-up costs. This can include any necessary supplies and equipment, utilities, insurance and solicitor fees. Since it will take some time for your business to turn into a reliable revenue generator, your first few months of bills might need to come from credit, too. Even if you choose to purchase a business that's already operating, you'll need to raise enough capital to acquire the enterprise.

Owning a small business can be a rewarding and profitable venture. A report from PayScale found that the average small-business owner in Australia makes $66,000 a year, and more experienced owners can make close to $80,000. While this might not seem substantial enough on its own, many small-business owners choose to continue to work a full-time, salaried position in addition to their business.

Invest in property

One of the oldest, most reliable financial investments is residential property. The populations of Australia's cities are booming, and property developers are working night and day to keep up with the demand for housing. According to data from Corelogic and reported by Aussie.com, the median value of houses and units has increased by 412% and 316%, respectively, since 1993. The average value of houses in Australia could grow to $2.9 million by 2043, and $2.1 million for units.

Because the value of property in the country is so high, you'll likely need to take out a mortgage to pay for any property you intend to buy. Regardless of whether you purchase property to rent it out to tenants or fix it up and sell it at a much higher value, property investment could be another lucrative source of income financed by additional debt. You can also wait for your investments to appreciate and then sell the property, using the proceeds to pay down some of your other debts.

Buy shares

If you want to try investing in the stock market, there are certain types of loans you can take out to give you a higher amount of capital to trade with. You can borrow money to invest in high-performing shares or other shares that will generate returns for you in the long term. With the money you earn from your investment, you can use the surplus cash to then pay down some of your other outstanding debts. If the shares appreciate in value, you could even sell them and put the amount you get back toward your other debts.

Get in touch with the experts

Going into further debt to pay off your total debt sooner sounds risky but if you put your money in sound, profitable investments, you could see your debt disappear in a few years.

At SmartMoney Wealth Management, we're committed to providing affordable financial advice and wealth management services to all Australians. Contact us today to get started with a free consultation.

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