The first step my wealth planning team and I follow to simultaneously reduce debt and build wealth for our clients is to identify their bad debt and take immediate action to restructure finances to reduce bad debt levels.
Assets and the Associated Debt…
For many Australians borrowing money from the bank is the only way they can afford to buy their own home… however not all debt is equal.
Non-income producing or lifestyle assets, such as the family home, when purchased with debt, act as a drain on personal finances with no income or tax savings to assist in the elimination of this bad debt.
Income-producing assets (investments) on the other hand contribute to reducing the financial drain debt can have on personal finances through the income generated and the tax-deductible benefits.
This highlights an important distinction between debts based on the purpose of the debt – being to purchase income generating investments, or non-income generating lifestyle assets usually referred to as bad debt or good debt.
Bad Debt is debt held against a lifestyle asset, and is not tax deductible
Good Debt is debt held against an income producing asset and is tax-deductible
Healthy finances have low levels of bad debt; wealthy finances often have serviceable levels of good debt attached to income-producing assets, and have favourable tax treatment.
[An example of tax-deductible debt is available in Strategy #1 – Negative Gearing in the Top 5 Wealth Creation Strategies eBook]
Are you after ‘healthy’ or ‘wealthy’ finances?
Recognising the type of debt you hold and transferring your bad debt to good debt is one of the most effective ways of improving your wealth position.
Transferring bad debt to good debt requires knowledge and a long term perspective.
This is where Debt Structuring contributes, serving four main purposes:
- Configuring your financial circumstances to reduce interest payable on debt
- Choosing debt products to reduce fees on complex lending facilities
- Structuring debt to reduce tax payable each financial year
- Balancing debt against income and expenses to improve cash flow
For more detailed information on the above debt structuring issues 1 & 2…
These recommendations address debt structuring issues 1 & 2 and have resulted in many of my clients cutting years, and $1,000s in interest from their non-deductible debts, improving the health of their finances.