Introduction:
When used properly, debt can be a very effective tool that may help you achieve your financial goals. Debt can be used to purchase a range of items that, otherwise, you would not be able to afford. It is also important to understand the difference between ‘good’ debt and ‘bad’ debt.

Understanding ‘Good’ Debt and ‘Bad’ Debt:

Debt can assist you in buying a family home, purchasing a car or consumer goods, and also enabling you to purchase investment assets such as shares, managed funds, or rental property. By using debt smartly, you may be able to reach your financial goals sooner.

Good Debt:
Where debt is used to acquire investments such as shares or property, this is known as gearing and is often referred to as ‘good’ debt. This is due to the potential to claim a tax deduction in respect of the borrowing, as well as the fact that you have borrowed against an asset that can appreciate in value.

Bad Debt:
Non-deductible debt like borrowings for consumer goods such as cars and holidays is considered ‘bad’ debt. Even though a loan for the family home is non-deductible, it should not necessarily be viewed as ‘bad’ debt since the value of the home has the ability to grow over time with no capital gains tax applied. In any case, paying off non-deductible debt before deductible debt will usually be the most appropriate course of action for many people.

Borrow to Invest:

Borrowing to invest allows you to access a greater asset amount than would otherwise have been possible. However, borrowing is not without its risks – while it may allow you to multiply your gains, it may also magnify any losses. There are different ways that you can gear into investments, including margin lending, using a home equity loan, or via a geared managed fund that borrows internally.

It is possible to be positively geared or negatively geared:

• Positive gearing occurs when the income generated by the asset exceeds the cost of the borrowing.
• Negative gearing is often associated with gearing into property. This occurs when the interest on the borrowing and other costs of maintaining the property exceed the return generated.

Borrowing involves risks, and we can help you determine if your investment profile might allow you to consider gearing as an option.

Techniques to Manage Debt:

Make Loan Repayments More Often:
Many home loans have the default repayment frequency as monthly. However, by making fortnightly instead of monthly repayments, you can cut the term of your loan and save a substantial amount of interest in the process. The saving arises because some of the loan is being repaid two weeks earlier than if the repayments were made monthly, and the total annual repayment is higher.

Debt Consolidation:
It is possible that people may build up a variety of different types of borrowings, including a home loan, car or boat loan, credit cards, investment loans, etc. By consolidating several loans, you may be able to have a lower overall borrowing cost, service your debt sooner, direct repayments to ‘bad’ debt first, and save interest. Additionally, you may also be able to simplify your finances significantly. However, how you manage the loans needs to be handled carefully so you don’t increase your overall cost.

Remember that the smart use of debt strategies can assist you in reaching your financial goals. Your financial planner can offer further advice that will best suit your circumstances.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.