Cash flow planning
Cashflow is a critical aspect of your financial life as it forms the foundation of achieving your financial goals for everything from a basic savings plan, realising investment potential or having a comfortable retirement. We can help you to identify where your cash is going and what steps need be taken to move ahead.
Debt or borrowed money can play an important role in helping you achieve your lifestyle goals and objectives. However, it is important it be managed and structured effectively to minimise borrowing costs. The way debt is managed may depend on whether it is considered ‘efficient’ or ‘inefficient’.
With both mortgage specialist and financial advisers at hand you can be assured that The Finmark Group will endeavor to implement the most efficient debt management strategy based upon your individual circumstances and requirements.
Types of debt:
Efficient debt (tax deductible)
In most cases, debt used to purchase assets that produce income (for example, a portfolio of
shares or an investment property) qualify for a tax deduction in relation to interest costs. This form of debt is considered to be ‘efficient’.
Inefficient Debt (non-tax deductible)
Loans taken out to purchase services or assets which do not generate income (for example, to purchase a principal residence, a car or fund a holiday) do not qualify for a tax deduction in
relation to the interest costs. In these cases the debt is considered to be inefficient from a wealth creation perspective and is often draining on your long-term wealth accumulation capacity when not managed properly.
Wherever possible you should try to accelerate the repayment of your inefficient debt. We specialize in the outlined common debt reduction strategies.
There are various debt management strategies that can be used to reduce inefficient debt. We have listed some common strategies below.
- Increasing your regular repayments
- Increasing payment frequency on your loan
- Making additional lump sum payments
- Utilising a credit card effectively in conjunction with your loan .
Consolidating your debt
A simple strategy to lower your overall interest rate and more easily manage your debt is to consolidate all debts into one loan that provides a lower interest rate and features to help you repay your inefficient debt faster.
Loan consolidation will save you interest where your new repayment and loan term are at least equal to your total current loan repayments and loan terms. Otherwise, you could be converting your short-term debts into longer-term debt and be paying more interest in the long run.
- Early termination fees may apply to your existing loan(s).
- The interest rate on your new loan may be higher than the rate on your existing loan(s).
- Loan consolidation can significantly increase your total interest costs if you make smaller repayments over a longer time.
- Application fees and stamp duty may be applied to your new loan.
In some cases, it may be appropriate to consider replacing inefficient debt with more efficient debt that can be used to create wealth tax effectively. This strategy is known as debt recycling but should only be undertaken after a thorough analysis of your financial situation.
Debt recycling can be an effective strategy to accumulate wealth over the long-term. It is a process of using surplus capital or cash flow to reduce inefficient debt and then replacing it with efficient debt in the form of an investment loan. The investment loan proceeds are then invested to form part of your investment portfolio. The inefficient debt is eventually extinguished and an investment loan with fully tax deductible interest remains. There is no tax benefit available on debt used for personal purposes, but a tax deduction is available on the interest expense on investment loans where the loan is used to purchase income producing assets. Debt recycling therefore results in a more tax efficient outcome and wealth accumulation benefits through the accumulation of an investment portfolio. Note the investment loan would need to be repaid at some point in time.
To implement this strategy, your tolerance for risk should allow you to feel comfortable with borrowing to invest. There are two ways debt recycling can be undertaken:
- Lump sum debt recycling
- Regular debt recycling