Managing debt – are you working for it or is it working for you?

On the other hand, if people borrow for a car, boat or if they use a credit card to buy things that lose value and don’t earn money, they’re behind in two ways – the lower capital value and all the interest they’ve paid.  This is “bad” debt.

Healthy debt management is often the first step in ensuring financial fitness.

People should consider paying out any non-deductible debt first, such as credit cards, personal loans and home mortgages, as its after-tax cost is usually highest. 

Any debt should be paid off in order of interest rate, highest to lowest. 

If someone is lucky enough to receive a lump sum of money, while it may be tempting to splurge, they will usually be better off in the long run if they use this money to pay off any non-deductible debt first.

Before people start building assets, it’s important to check what they owe – how much, in what form and at what interest rate.  Then they can see whether they can arrange their debt more efficiently.

People with several bank accounts and credit cards should consider consolidating them, helping to reduce fees and charges, not to mention being easier to keep track of spending.

People could also think about rolling all their non-deductible debt into their home loan as this is usually the lower interest rate.  At the same time, people should look at increasing their home loan repayments so they don’t end up taking longer to pay off the debt.

Arranging for income to be paid directly into a home loan and using a credit card for daily purchases can help people make considerable savings on interest payments.   Of course, this will only work properly if people are disciplined to pay off their credit card debt each month.

Borrowing money to invest, known as “gearing”, can be a powerful way to build wealth, but beware – gearing has more risk attached to it than investing with money that has been especially put aside. Borrowing provides a larger sum to invest and earn returns, so in good market conditions earnings can be multiplied. While investing more money can provide the opportunity to increase potential gains when markets are rising, gearing can also increase the impact of losses in falling markets.  People should always get advice before they start borrowing to invest to make sure it is the right strategy for them.

A financial planner can work with people to help them make sure all of their debt is working for them, not against them.  It’s always important for people to seek advice on their own personal circumstances from a professional financial planner before making any investment decisions.

If you would like more information about debt management contact CWFS to make an appointment.