Avoid “bad” Debt – But “good” Debt May Be OK For You!

Avoid “bad” Debt – But “good” Debt May Be OK For You!

It’s a common thought that we need to avoid debt, or pay off any debt we have as fast as possible. That is good, solid, but conservative advice.

Why conservative? Because you may be able to grow your financial assets faster by using what we call “good” debt. Let’s explain this:

From a financial planning perspective, you would like to have no debt, but if you do have debt, you really want to ensure that the interest you pay is tax deductible. Tax deductible interest (interest on loans for shares, rental properties, and other income producing assets) is good debt.

Interest that you pay on your home loan or personal credit cards or on personal loans is “bad” debt, because you cannot claim this interest as a tax deduction.

Most people have a home loan and personal credit cards, and the interest on credit cards is much higher than for your home mortgage. That’s why financial planners recommend that you use whatever surplus income you have each week to first pay off your credit cards, and then once you have done this you can start to make extra repayments towards your home loan. If your home loan has an interest rate of 6%, then you effectively earn 6% for every dollar you pay off your home loan.

Here’s where debt may be good for you:

If you feel comfortable investing in shares and you expect a 10% return for the year, you could withdraw an amount from your home loan (if you have a redraw facility) and invest this in shares. Should your home loan be at 6% interest, and this leaves you with a 4% gain for the year. So if you invested $100,000 this way, you would make an extra $4,000 per year after interest costs. Sounds good, doesn’t it?

There are always risks with any investment, hence the phrase ‘risk versus reward’ and to help minimize this ‘risk ’contact Stafford Accounting and consultants.

We can help you!

Our accounting firm specialises in loan structuring to ensure your wealth is maximised and your tax is minimised. Contact Stafford Accounting today and maybe some “good” debt will make a big difference for your future retirement plans!