Typically used to buy goods, services and assets that generate zero income, inefficient debt forces you to rely on your own income sources and assets to repay it while accruing costly interest that is not tax deductible.

Examples include home loans, credit cards and personal loans that often impact other wealth building opportunities. Hello Wealth financial advisers recommend reducing this type of debt as quickly as possible, first repaying those charging the highest interest rates, and potentially consolidating these debts into the loan with the lowest interest rate.

Efficient debt is used to buy assets with the potential to grow in value and generate potentially tax deductible income which can then be used to help repay the loan.

Examples include investment property loans, investment loans and business loans – often used to build long term wealth.

Otherwise known as instalment gearing these loans allow borrowers to use shares or managed funds as security.

Since the interest costs are usually tax deductible gearing can be a tax-effective strategy and one only recommended by Hello Wealth for investors who are comfortable with an above average level of risk and are well versed in rigorously tracking and assessing multiple investments.

Lenders allow a maximum gearing level known as the debt to asset ratio or loan to value ratio (LVR) so if markets fall and investment values drop they may make a margin call, requiring more money, security or assets to be put up at short notice in order to restore the LVR and bring the gearing down to the agreed level.