‘Bad Debt, Good Debt, Smart Debt’

Getting rid of ‘bad debt’ and getting into ‘smart debt’ can help you achieve financial freedom!  We have been conditioned to think of debt in terms of being negative. However, if structured correctly debt can be used to effectively create wealth, and enhance your financial prosperity.  The key is finding out how to structure your debt so that it works for you.

Debt allows us to buy things that we would otherwise not be able to own and enjoy, like the family home, What’s more, using debt the right way can be a great way to create wealth and reduce tax along the way.

There are typically three types of debt, they are:

‘Bad Debt’ is borrowing money – typically at a high interest rate to buy something destined to go down in value such as a used motor vehicle or plasma TV. Usually the loan provides no tax advantages.  Bad Debt should be avoided or managed very carefully.  We are not saying you cannot ever use your credit cards, just that they should be used cautiously and if possible paid off each month to avoid hefty interest bills.

‘Good Debt’ is what most of us would describe as necessary debt, the unpaid mortgage on the property we live in. While interest payments are not tax deductible, the home at least has the potential to grow in value over the long term.

‘Smart Debt’ is typically defined as debt having a low interest rate, that is used to purchase an income producing asset, hence the interest cost may be tax deductible and the asset has the potential to grow in value over the long term.  This may include borrowing to start a business, borrowing to invest in shares or property etc.

It is our aim that clients consolidate their total debts, remove and avoid bad debt and have more smart debt in order to create future wealth.  There are several debt strategies which can be used to create wealth and improve financial position, they include:

Debt Consolidation – many of us have more than one form of debt, each with its own applicable interest rate.  The process of debt consolidation enables you to pool your debts into one loan with a more competitive interest rate.  You then pay off other debts and avoid paying excessive interest charges.  There are costs associated with debt consolidation so it is important that you get advice before doing so.

Debt Recycling – a strategy which eliminates bad debt and coverts good debt into smart (tax effective) debt.

Gearing – a gearing strategy requires you to borrow funds for investment purposes.  This can be done as a lump sum or in installments.  This allows you to have more money invested that you could otherwise have done, therefore creating opportunity for higher returns.  All costs associated with the gearing loan (debt) are also tax deductible.

Debt Transformation – this is a strategy to adopt should you receive a financial windfall.  It is also a process of converting good debt into smart debt, by paying a financial windfall against your mortgage and redrawing the monies for investment purposes.  The investment loan should then be tax deductible which is ‘smart’ or efficient debt.

As you can see there are many ways that you can improve your debt situation and make it work for you.  We believe that choosing the right strategy and structuring debts correctly can save you a great deal more than if they simply shop around for the best interest rate available.  A solid structure can reduce the long term cost of a loan and therefore create greater opportunity to create wealth and reach your financial objectives sooner. Contact WealthPartners for more information on how they can help you take control of your debt and make it work for you.

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