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Debt Management
Debt, or borrowed money, can play an important role in helping you to achieve your lifestyle goals and objectives. However, it is important that it be managed and structured effectively to minimise borrowing costs. The way debt is managed may depend on whether it is considered “efficient” or “inefficient”.
In most cases, debt used to purchase assets that produce income (for example, a portfolio of shares or an investment property) qualify for a tax deduction in relation to interest costs. This form of debt is considered to be “efficient”.
Loans taken out to purchase services or assets which do not generate income (for example, to purchase a principal residence, a car or fund a holiday) do not qualify for a tax deduction in relation to the interest costs. In these cases the debt is considered to be inefficient from a wealth creation perspective and is often draining on your long-term wealth accumulation capacity when not managed properly.
Wherever possible you should try to accelerate the repayment of your inefficient debt. Outlined below are common debt reduction strategies we recommend.
- Consolidating your debt.
- Increasing the frequency of your payments.
- Making additional lump sum payments.
- Increasing your regular repayments. You could either transfer surplus cash into your loan on a regular basis, or use a salary crediting arrangement, which means having your surplus cash flow paid directly into your home loan. It enables surplus funds to reduce your outstanding loan as soon as possible.
- Using a credit card effectively in conjunction with your loan.
- Using an offset account - A 100% Offset Account operates as your normal transaction account, ensuring that you retain complete flexibility and access to your funds. It is a separate account to your loan, however, when your interest is calculated, the funds held in this account are ’offset’ against your loan, effectively reducing your interest liability.
- Using a redraw facility - A redraw facility allows any funds paid into the loan above the minimum requirement to remain available to you upon application to your lender.
- Debt Recycling - This is the process of using surplus capital or cashflow to reduce non tax-deductible debt and then replacing it with tax-deductible debt in the form of an investment loan. The investment loan proceeds are then invested to form part of your investment portfolio.
For further information and an assessment of your own personal needs, contact Star Financial Services here.
