Using debt effectively

Smart Strategies for 2020

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

Appreciating the value of debt

Using debt, you could buy a house you may not be able to afford outright. You just need enough to cover the deposit and costs 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 shares and property. This strategy, known as gearing, may help you to build an investment portfolio faster than you otherwise could have.
To help repay the loan, you’ll have income generated by your investments. So, for many people, servicing an investment loan may be an achievable outcome.
In this booklet, we outline nine strategies that have the potential to be highly effective in helping people make the most of debt.
Individually, each strategy could significantly improve your financial position. By using a number of them in combination, you could optimise your finances and achieve financial independence sooner.

There are two types of debt you could use:

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Strategies at a glance

Strategy

Potential key benefits

1

Consolidate your debts to save money
  • Reduce the interest rate applying to your debts
  • Pay off your inefficient debts sooner

2

Use your emergency cash reserve more effectively
  • Earn a higher after-tax return than a cash account
  • Pay off your inefficient debts sooner (while retaining full access to your money)

3

Harness your cashflow to reduce inefficient debt
  • Save on interest
  • Create equity in the family home that could be used as security for an investment loan.

4

Use borrowed money to build wealth
  • Multiply your investment profits
  • Achieve your wealth goals sooner

5

Transform your debt using a financial windfall
  • Replace inefficient debt with efficient debt
  • Establish an investment portfolio to help build your long-term wealth

6

Build wealth via debt recycling
  • Replace inefficient debt with efficient debt on a regular basis
  • Establish an investment portfolio to help build your long-term wealth

7

Offset your investment loan to retain cash-flow efficiency
  • Earn a higher after-tax return than a cash account
  • Withdraw money for any purpose without affecting the tax deductibility of the loan

8

Make gearing more effective for a couple
  • Reduce tax on investment earnings
  • Accumulate a larger amount of wealth

9

Leverage your investment via an internally geared share fund
  • Access the power of gearing without having to arrange an investment loan yourself
  • Take advantage of potentially lower interest costs