Debt Is a Tool — It’s How You Use It That Defines Your Wealth

Debt is a tool — and like any tool, it builds or it breaks depending entirely on the hand that holds it. Most Australian families were never taught the difference, so they pick a side: terrified, or overexposed.

Picture two households. Both earn a combined $280,000. The first treats every dollar of debt like a threat, so they funnel every spare cent into the mortgage and feel guilty about the rest. The second carries a car loan, a credit card balance, and three Buy Now Pay Later accounts, yet tells themselves it’s all under control. Here’s the uncomfortable part: neither household is building wealth, and both believe they’re doing the responsible thing.

That’s the trap. The truth is that debt is a tool, not a moral verdict. You’re not reckless for carrying it, and you’re not virtuous for avoiding it. What actually defines your wealth is the direction the borrowed money travels — toward an asset that grows, or toward a purchase that shrinks the moment you own it. Moreover, in 2026 that distinction matters more than it has in years.

Fear and overexposure are the same mistake

At first glance, the cautious household and the comfortable-with-debt household look like opposites. In reality, they share one flaw: neither has ever asked what their debt is for. The avoider sees a single category called “bad” and runs from all of it. Meanwhile the overexposed family sees a single category called “normal” and accepts all of it.

Consequently, both miss the lever that actually matters. Australia’s tax system, for example, treats interest very differently depending on why you borrowed. Borrow to buy income-producing assets and the interest is generally deductible. Borrow for a holiday on a credit card and you simply pay full freight, forever. That single structural fact — not willpower — explains most of the gap between two families on identical incomes.

The advice to eliminate every debt sounds prudent, and for high-interest consumer debt it absolutely is. However, applied universally, it can leave money on the table. Consider the family racing to clear a 6% home loan while holding no investments. They feel disciplined, yet over a decade they forgo the compounding they could have captured by directing some of that capacity toward growth assets.

This is where debt is a tool stops being a slogan and becomes a strategy. The goal is never “more debt” or “zero debt.” Instead, the goal is the right debt, pointed in the right direction, sized to what your household can comfortably service. For a deeper look at how this plays out across a balance sheet, our piece on turning a mortgage into a quiet wealth engine walks through the mechanics in plain terms.

Importantly, the foundation never changes. An offset account against your home loan sits beneath every life stage, giving you flexibility without locking money away. Read more in Turn Your Mortgage Into a Quiet Wealth Engine, which we return to often with clients in their 30s and 40s.

Follow the money, not the feeling

When you accept that debt is a tool, one question replaces all the guilt and bravado: what is the borrowed money doing? If it bought an asset that grows in value or produces income — an investment portfolio, an income-producing property, your own business — the debt is working for you. If it bought something that loses value the day you take it home, the debt is working against you.

For instance, a $40,000 investment loan and a $40,000 car loan can carry the same interest rate. Yet one funds an appreciating, potentially deductible asset, while the other funds a depreciating one with no tax benefit. Same dollar of debt, opposite outcome. That is the entire game in a single sentence.

This question matters more in 2026 than it did a few years ago. In May 2026 the Reserve Bank lifted the official cash rate to 4.35% — its third increase this year — and signalled it would do what was necessary to bring inflation back to target. As a result, every dollar of debt now costs more to carry than it did, which sharpens the line between productive and unproductive borrowing.

Higher rates punish the wrong debt hardest. A credit card or BNPL balance that felt manageable at low rates becomes genuinely expensive, because none of that interest is deductible and none of it buys an asset. Meanwhile, well-structured investment debt still has a role — but the margin for sloppiness has shrunk. Put simply, the rate environment rewards families who know the difference and quietly penalises those who don’t.

If you want to think through how borrowing fits a full portfolio in this climate, Victor unpacks the trade-offs on the Elevate Your Wealth podcast episode on the basics of building wealth, covering mortgages, super, and where investment debt belongs.

Debt has a deadline you can use

June is the month where the good-debt distinction turns into real dollars. Interest on borrowings used to produce assessable income is generally deductible, and the timing of that interest can matter at year end. For instance, some investors prepay a portion of investment loan interest before 30 June to bring the deduction forward. That is a legitimate, ATO-recognised strategy — not a loophole.

Crucially, none of this applies to consumer debt. The interest on your card, your BNPL, or your personal car loan stays non-deductible no matter when you pay it. Therefore, the families who benefit from June are those who already borrowed with purpose. You can read the official position on investment income deductions on the ATO website before acting.

That said, deductibility is the icing, not the cake. A deduction never makes a bad asset good. The point of structuring debt well is the asset underneath it — the tax treatment simply rewards you for getting the structure right.

At CFV Advisory, we don’t ask clients to fear debt or chase it. Instead, we ask them to give it direction. The clearest example is debt recycling: returns from investments help pay down your home loan, that repayment builds equity, and the equity is then redrawn as an investment loan. Over time, the same dollars cycle from non-deductible home debt toward deductible, asset-backed debt.

For most couples in their 30s and 40s, this directional approach tends to take priority over extra super contributions, simply because the loop builds an accessible asset base earlier. Closer to retirement, the balance shifts and super does more of the heavy lifting. Throughout every stage, however, the offset account remains the steady foundation. Our note on using home equity to invest the smart way covers the guardrails.

Put another way, every debt you hold sits on one of three rungs: bad debt that quietly costs you, good debt that supports you, and smart debt that compounds for you. The reframe is moving up the rungs deliberately rather than letting debt drift wherever life takes it.

What to do next

Start by sorting what you already owe into two piles: debt that bought something growing, and debt that bought something shrinking. Next, attack the shrinking pile first, because that interest buys you nothing and now costs more. Finally, before June ends, check whether any investment-related interest deserves attention this financial year.

If you’re unsure which pile a particular debt belongs in — and the mortgage genuinely sits in a category of its own — that grey zone is exactly where structure pays off. Our companion piece, The Leakage Audit, gives you a step-by-step way to find the money already slipping through.

Prefer to listen? Catch this episode on the Two Incomes, One Plan podcast.

This article contains general information only and does not take into account your objectives, financial situation, or needs. It is not personal financial advice. CFV Advisory and Victor Idoko are authorised representatives operating under the relevant Australian Financial Services Licence. Consider seeking personal advice and reviewing the relevant disclosure documents before making any financial decision.