William Shakespeare wrote, “Neither a borrower nor a lender be”, but the fact is debt can be a very useful tool – when used properly.

Using debt, you could buy a house you may not be able to afford outright. You just need some equity and you can borrow the rest, assuming you can make the repayments.

Debt can also be used to buy investments with potential to grow in value, like share and property. This strategy, known as gearing, may help you to build an investment portfolio faster than you could have otherwise.

To help repay the loan you’ll have income generated by your investments and possibly some tax deductions. So, for many people, servicing an investment loan can be an achievable outcome.

2 Types of Debt

Inefficient Debt

• This is used to buy goods, services and assets that don’t generate income, will depreciate in value, or have no value once they are used
• You can’t claim a tax deduction on the interest cost of the debt
• You don’t receive any income to help you repay the debt, so to service the debt you have to rely on your own resources
• It’s wise to reduce this kind of debt as quickly as possible

Efficient Debt

• This is used to acquire assets that have the potential to grow in value and generate assessable income
• You can claim a tax deduction on the interest cost of the debt
• You can use the income generated by the asset to help repay the debt
• It’s more easily serviceable, and it can be used to accelerate the creation of wealth

10 Strategies to Make the Most of Debt

• Consolidate your debts to save money
• Use your emergency cash reserve more effectively
• Harness your cash flow to reduce inefficient debt
• Use borrowed money to build wealth
• Gear your investments gradually by borrowing in instalments
• Transform your debt using a financial windfall
• Build wealth via debt recycling
• Offset your investment loan to retain tax efficiency
• Make gearing more tax-effective for a couple
• Leverage your investment via an internally geared share fund

Talk to us to determine which of the strategies best suit your situation.

This entry was posted on Thursday, April 22nd, 2010 at 4:05 pm and is filed under Finance, Financial Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.