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.
Our first two rules of Debt Management are:
- Don’t bite off more than you can chew… leave yourself plenty of room for interest rate rises and unforeseen events such as temporary unemployment or home maintenance.
- Don’t use a credit card… unless you are disciplined in repaying the balance every month.
There are two main types of debt:
- Efficient or Deductible Debt – 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”.
- Inefficient or Non-Deductible Debt – 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.
By a simple restructure of debt, assets and/or repayments you could often save thousands of dollars over the life of your loan. A Luka Group Financial Adviser can help make sure you are maximising the effectiveness of your debt.
Contact a Luka Group Financial Adviser today to discuss Debt Management strategies.
Smart strategies for using debt