Debt can be a benefit or a burden, depending on how you manage it. We look into how you can manage your debt to your advantage
Did you know that there are ways to make debt work for you? While too much debt can be stressful – you only have to look at Europe to see the effects – a well-managed debt solution can be a positive and useful means of strengthening your financial position.
Debt can be worthwhile when you borrow money to purchase an investment property or shares. You can use any income or dividends to pay off the loan, and benefit from any increase in the value of the investment, while potentially reducing the amount of any income tax to be paid along the way.
Debt may become a burden when used for purchases that don’t generate you any income or don’t suit your personal circumstances. Expensive cars, trips overseas or shopping sprees can bring much joy in the short term, but paying them off may prove to be difficult in the long term. These items carry low capital value, and although the emotional return on investment may be great, they don’t earn you any money to pay off a loan.
Of course, events in life can make it necessary for you to take on debt, whether it’s for education, for medical treatment or on loss of employment. Home ownership is another key reason for taking on a loan. While some may see debt as a necessity, it’s important to guard against borrowing too heavily. Know what suits your needs, what you can afford to borrow and keep within a budget.
The first step to healthy debt management is to prioritise your debts. Work out which is the most urgent debt that needs to be paid off, because not all debt is borrowed under the same conditions. Think about the fees, penalties, interest rate and the term of each debt.
Another good option is to consolidate your debts. Simply put, this means combining all your loans into one. It makes repayments more manageable and can reduce the amount of interest you have to pay. Make sure that the interest on the new loan is less than that of the old loans and that you don’t use your credit card to take on additional debt.
If you have savings, it may help to pay off whatever debt you can. This may be practical if you’re paying more in loan interest than you’re earning through interest on your savings or share dividends.
Consider ways to increase your income by doing some overtime work and use any bonuses to pay off debt. Dispose of all credit cards, except for one that has the lowest interest rate, because you may need a credit card in an emergency. And learn how to spend less – this always helps.
Use debt sensibly to ensure that you benefit from it. And if you are in or may be falling into a serious debt situation, tackle the issue head on – ignoring debt won’t make it go away.
Talk to us today for more information on how to make debt work for you.
What you need to know
This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning and other companies within the AMP Group will receive fees and other benefits, which will be a percentage of the premium you pay and/or the advice fee you agree with us. Some of the information in this article is based on our interpretation of the law. It is a summary of the subject matter covered and is not intended to be comprehensive tax or financial advice. No reader should act on the basis of this article without obtaining specific professional advice. Further details are available from us, or AMP Financial Planning Pty Limited on telephone 1300 157 173.