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Investment - Good debt vs. Bad debt

Discussion in 'Business, Investment and Economics' started by tech/a, Jun 21, 2017.

  1. tech/a

    tech/a No Ordinary Duck

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    From time to time I'm asked to speak to school kids in their final year.

    I make an example of investment in Business V Investment in a Sports Car
    both on credit as a powerful example of good debt V bad debt.

    I'm often told this has a clear effect on some students.
    Keeping it very basic.

    Loan for a $50000 sports car 5 yrs @ 8% cost $70000
    Tax deduction Zero
    Depreciation Zero
    Return Zero.

    Loan on say a $50,000 Mini Excavator $50,000 @ 8% Cost $70,000 over 5 yrs
    less depreciation at 22.5% a year less tax deduction on interest.
    Return $100/hr if you self drive, or $150,000 based on 30 hr a week.
    Or $100k if you employ a driver.

    For some the penny drops loudly!
     
    Rypieee, PZ99 and luutzu like this.
  2. kid hustlr

    kid hustlr

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    Can't drive an excavator to the movie/shopping centre/club though
     
  3. dutchie

    dutchie

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    You could. Not very romantic though.
     
  4. PZ99

    PZ99 ( ͡° ͜ʖ ͡°)

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    Whether you should or not depends on how bad the movie is :)

    First car lasted me 30 odd years. I've avoided all debt outside of housing. This is partly because when the interest rates shot up to 17.5% on my home loan I needed a second job to pay for it.
    Never had a credit card or whatever. If I didn't have the money I didn't buy anything.
    When the rates cane down the value of the house went up so in that sense it was good debt... but I don't think that applies today. So in that sense I don't think there's much in the way of "good" debt these days.
     
  5. skc

    skc Goldmember

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    That's some very important and basic life skill / perspective that the school system doesn't always teach... good on you.

    On a related but different note... the decision to NOT take on bad debt is both financial and psychological. Some people just can't live with delayed gratification... they must have the latest and greatest phone/car/gadget/shoes etc etc, and going into bad debt is often the consequence.

    I find this study very interesting...known as the Marshmellow test, it found that the power of delayed gratification is one of the most powerful predictor of future success in children. May be this material can help your audience better tackle the psychological aspect of not incurring bad debt.

    https://en.wikipedia.org/wiki/Stanford_marshmallow_experiment


    {Edit: This is a better video}

    But you can do this!

     
  6. rb250660

    rb250660

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    What are your thoughts on borrowing to buy a property to live in vs investing that money into something like a business and foregoing the property purchase?
     
  7. basilio

    basilio

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    But you can do this!

    [/QUOTE]

    THAT is so xxxxing cool!! Brill..
     
  8. PinguPingu

    PinguPingu

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    What about buying self funding installment warrants on STW and IVV and rolling them for decades :p
     
  9. tech/a

    tech/a No Ordinary Duck

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    A very important question which alludes to many other similar questions.

    Ill answer it in this way.

    Basically there are 3 ways people look at creating wealth beyond the norm.
    (1) Their own Business
    (2) Stock market
    (3) Property.

    There is a 4 th and that is academia becoming a Doctor/Lawyer/Professional in some field.
    but in cases where wealth is out of the ordinary these professionals have their own businesses
    in which they employ other professionals. Like an Engineer buying/starting the firm.

    So House first or last?

    Lenders want
    (1) Collateral
    (2) Serviceability.

    That goes for buying a business or gaining start up capital for any business as well.
    With the difference being in deposit---its a lot more for a business.
    A serious business will set you back as much as a house in Sydney and much more!
    So will the long term costs of starting from scratch.

    So as I've said a few 100 times the biggest killer in the 3 wealth creators above is Capital.
    up to 95% fail in the top 2 pursuits and if you don't get your timing right failure or lack lustre
    returns come from Property investment.

    In very GENERAL terms!

    To return an above average wage you'll need a business making 10-15% return on a $2 million
    a year T/O. Anything under that and your self employed and struggling.
    Similar applies to Trading/investing small capital bases are in significant in the creation of
    substantial wealth creation.

    Sure many of us including myself have started with nothing (3 times in my case) to eventually
    make it. But you really have to go many years without gratification often questioning the
    logic in your logic.

    And yes there are a very few that turn $5000 into Millions even billions.
    But truth is its not likely to be us!

    So my short answer to a longish reply is build the base to build the bigger base.
    Once you get over the magic mark (In black)-----then Pandora is waiting!
     
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  10. McLovin

    McLovin

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    If $200k/year is what you aim to achieve you easily accomplish that in a salaried job on the east coast. Even a non-equity partner in a mid-size law firm is probably pulling that in. And let's not forget banking and finance where $200k+ is pretty much the norm at fairly junior levels. In fact, I'd say anything less than $250k/year for a family in Sydney is solidly middle class these days.

    I guess that's emblematic of the difference between Sydney and Melbourne and the rest of Australia.
     
  11. tech/a

    tech/a No Ordinary Duck

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    These are examples.
    There has to be a base I have selected $200-300K.
    Of course you'll need to adjust geographically.

    A friend of mine who started his Cardiology Practice in Launceston
    would be laughing.

    My Civil Business in Adelaide would be 3 x its size in Melbourne or Sydney
    due to the much larger markets.
     
  12. skc

    skc Goldmember

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    Getting off topic, but this is quite interesting.

    http://www.smh.com.au/federal-polit...-think-they-are-battlers-20160212-gmt62w.html

    A $250k income for a family of 2 adults + 2 kids under 15 years will put you in 90% rank in the standard of living in Australia. Even if you adjust for Sydney's population overall being wealthier than the rest of Australia, I'd say it is still better than solid middle class (I define middle class at the middle 50%).

    This finding was also quite interesting.

    There is obviously a large skew in the top 10% band... I guess when households are at the bottom of that band they tend to look up and compare themselves to the top 1% those people.
     
  13. kid hustlr

    kid hustlr

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    Depends on your definition of middle class, 250k living in the north shore with 2 kids at Knox is barely getting by but I would still argue a family of income of that amount still leads to living quite well.

    tech,

    What was the answer to buy a house first or last?

    EDIT:

    Just saw SKC's reply which was interesting. I know many above the mark and many below - I still maintain 250 is a very solid family income
     
  14. tech/a

    tech/a No Ordinary Duck

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    A business whether it be purchased or financed by your own growing of a business
    from start up and its own earnings take a lot of capital.

    The point I'm making is that businesses which are big enough to make a massive difference to life style
    (10 mill at 10-15%) take a lot to get there.
    These sort of businesses take time in the large majority of cases to build.

    My personal feeling is that its an individual call.
    Even whether you have a house of your own or a business of your own.

    I chose the business route.
    I was never going to be happy with a wage and limited growth potential.
    When the time came the foundation built from business allowed me to
    realize the full potential of the property opportunity in the late 90s.

    If your similar to me then you have my answer.
     
  15. Mark Anthony

    Mark Anthony

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    sort of destructive but unique haha
     
  16. Mark Anthony

    Mark Anthony

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    y

    well I think what tech/a (thread starter) would like to convey to his students to choose an investment that actually gives you something in return, a useful investment. a car is usually a dead investment but it does provide convenience, unless you are using it for Uber, etc.
     
  17. McLovin

    McLovin

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    I don't think I'd define it as being at the 50% level. It's supposed to be a pretty wide income group. I'd say it extends a lot further than 50%. I agree with you it depends on where you live. Rich in Hobart is getting by in Sydney. Like rich in Kansas City is surviving in NYC.

    So in your example, $250k is $157k after tax. Let's say they've bought a house on the North Shore and it's a modest place and borrowed ~$1.2m (that's a pretty conservative price I think for the North Shore – verging on unrealistic). Repayments on that house (at 4%) are ~$69k/year. So now after tax and housing they have $88k left. To send two kids to Knox will cost upwards of $50k/year, depending on what year the kids are in. So in this hypothetical example, the "wealthy" family have ~$38k left after tax, mortgage payments and school fees. And they don't even own a car yet! Even if they send their kids to the local public school $88k/year for a family of four is hardly rollin' in cash. The median house price (houses not all dwellings) in Sydney is $1m now, so I think my mortgage example could be applied to most parts of Sydney. If we had a viable rail network, then I think housing would become much more affordable because you could, for example, live in the Southern Highlands and commute in. That's pipe dream stuff though.
     
    Last edited: Jun 24, 2017
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  18. kid hustlr

    kid hustlr

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    so either every man and his dog is a doctor or high up in the financial services industry making 300 a year or there's a lot of people in the edge.

    My view is probably the latter.
     
  19. McLovin

    McLovin

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    There are plenty of people who are on the edge, you just need to look at the level of mortgage stress. My point really was just to illustrate that even on $250k/year a family will be leading a middle class lifestyle. They're not going on holidays to Europe or skiing in Vale or driving the latest BMW or Merc.
     
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  20. sptrawler

    sptrawler

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    People on $250k a year, in W.A, is not many.IMO
    Definitely not on wages, maybe a few in business, who are on top of their game.
    Mining wages have dropped back to pre boom levels, as has the price of houses.
    I would say many are hanging on, by the skin of their teeth.
    I know one engineer, who was riding high on demand, now is a courier.
    The geologist sector, is suffering the same, things aren't going to turn around quickly. IMO
    It says a lot, when the Federal Government put a tax on the banks, then the State Governments put a tax on the banks, it is just an increase in tax on the people by slight of hand. LOL
    It shows we are in deep $hit.
     
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