19 Dec Financial Strategy: A Smarter Way to Use Debt
Debt is an almost unavoidable part of modern-day life. This isn’t necessarily a bad thing as long as your debts are kept at an appropriate level. In fact, when managed properly, debt can be used to your advantage especially if you have deductible debt. A financial strategy is an effective way to outline and manage all of your debts. Here are some reasons to consider why you need a financial strategy NOW!
1. Not all debt is the same
Many people think of all debt in the same way but it can be classified one of two ways:
- Non-deductible debt is money that has been borrowed to buy personal items. For example, credit cards, car loans and home loans are all classified as non-deductible debt. This is because the interest you pay on this type of debt is not tax-deductible.
- Deductible debt is money that has been borrowed to buy an income-producing investment. This includes debt such as investment loans used to purchase a share portfolio, an investment property or managed funds. As the name suggests, this type of debt is tax-deductible.
2. There’s a better way of using debt
Your mortgage is probably your biggest debt, but interest repayments on your home loan are not tax-deductible. So while you get the benefit of being able to purchase a home much sooner, you pay handsomely for the convenience.
But if you’ve had your mortgage for some time, you may have some equity in your home that could be used to restructure your debt in a way that is more beneficial for you. Your financial adviser will be able to help you evaluate the amount of equity you can apply for. In some instances, it is possible to borrow up to 80% of the value of your home. This money could then be directed to other parts of your financial strategy to help reduce some of your non-deductible debts that charge higher interest rates, such as credit card debt or it may serve as an emergency cash reserve.
3. Restructure your debt
With a financial strategy, you may be able to restructure your debt to consolidate your non-deductible debt into a single loan using a line of credit facility. The consolidation of debts into one, easily-managed facility may result in lower ongoing interest costs and possibly reduce the amount of bank fees you have to pay too.
4. Put your extra cash to work
By restructuring your debt you can save on interest repayments. With this extra cash, you could use it to diversify your financial strategy. One way to diversify your financial strategy is by starting an investment loan which is deductible debt. Any investment returns you receive can be used to further pay down your non-deductible debt, creating a positive cycle for growing your wealth.
Get it done the right way
Restructuring your debt can be quite complex. There are many factors that need to be considered, such as penalties for refinancing your current loans and keeping on the right side of the tax rules. If you are looking to restructure debt or wanting to start a comprehensive financial strategy, get in touch with our team and see how we can help you achieve your financial goals.
If this is a topic that you would like to discuss in more detail, please go to www.MasterYourMoneyNow.com.au/getstarted to book in your complimentary 30-minute strategy session.
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Disclaimer: This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Past performance does not guarantee future returns.
Chris Carlin is an Authorised Representative (No. 1235031 for financial services and No. 514748 for credit) and Master Your Money Now Pty Ltd ABN 65 627 229 681 is a Corporate Authorised Representative (No. 1265677 for financial services and No. 514747 for credit) of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523