As the cost of living increases year by year, it is perfectly normal to have some concerns when it comes to your finances. In fact, statistics revealed by Mortgage Choice show that more Australians are either very worried or concerned about their financial situation compared to a year or two ago. The percentage rose up from 44.6 in 2013 to 52.4 in 2015.

But there is a silver lining for every Australian who has to pay his/her debts. Even though you cannot pay them by miracle, you can use a smart strategy in order to get rid of your debts faster: tackle bad debt before other debts.

What Is a Bad Debt?

There are two main categories of debts: tax-deductible or non-tax-deductible. The first group of debts are also called good debts because they help you make money. This category refers to that type of debts you have on diverse products or services that are making money for you, delivering you real profit, such as an investment property.

On the other hand, there is non-tax-deductible debt, also referred to as bad debt. This kind of debt includes all those services or products for which you have borrowed money, but they are not financially rewarding. For example, you have a personal loan that you used to buy a new TV, cooking appliance and other things that are for your personal use. These cannot bring you a financial profit. In this category, we can also include car loans or credit cards. In Australia, the loan for your current home is also considered a bad debt.

Why Should You Pay Bad Debt First?

Don’t forget that a good debt does not only mean having some money borrowed. It also means a certain income for you, whether it’s a high or low one. This implies that such a debt will help you pay it. In fact, most of the time, a tax-deductible debt is going to offer you a substantial financial reward that will cover much more than the mortgage interests for it. This way, you will benefit from the debt, and your cash flow will be boosted. This will also help you become debt-free very soon.

But if you also have a bad debt or a few, they will drag your cash flow down. You can no longer enjoy the financial benefits of your good debts because you need to use the money you make from these debts for paying the mortgage interest of your non-tax-deductible debts. For this reason, tackling bad debt before other debts will help get rid of any debts faster.