Debt can be a powerful tool for building wealth, but it can also be a significant financial burden if not managed correctly. Whether you're struggling with consumer debt or considering using debt to invest, a financial planner can help you develop a strategy that works for you.

Debt can have a profound impact on your ability to build wealth, both positively and negatively. A well-structured borrowing program can increase your equity, while a poorly managed one can erode it.

Understanding Your Debt

There are two main types of debt:

• Consumer Debt: Money borrowed for personal lifestyle expenses, such as home loans, car loans, and credit cards. The interest on this debt is generally not tax-deductible.

• Investment Debt: Money borrowed to invest in assets like property or shares. The interest on this debt is often tax-deductible.

Considerations for Managing Consumer Debt

If you have consumer debt, the goal is to pay it off as quickly as possible to minimise the interest you pay. Strategies include:

• Budgeting: Create a budget to track your income and expenses and identify areas where you can save money.

• Debt Consolidation: Combine multiple high-interest debts into a single loan with a lower interest rate. This can simplify your repayments and reduce your overall interest costs.

• Prioritising Repayments: Focus on paying off your highest-interest debts first.

Using Debt to Build Wealth (Gearing)

Gearing is an investment strategy that uses borrowed funds to invest, with the objective of increasing your wealth over the long term. While it can magnify your returns, it also magnifies your risks.

• Negative Gearing: This occurs when the costs of borrowing and holding an asset are greater than the income it generates. The loss can be offset against your other income, reducing your tax bill. The aim is for the capital growth of the asset to outweigh the income loss.

• Positive Gearing: This is when the income from the asset is greater than the borrowing costs, resulting in a positive cash flow.

Gearing is a high-risk strategy that is not suitable for everyone. It requires a long-term investment horizon and the ability to service the debt, even if the investment performs poorly. A financial planner can help you determine if gearing is right for you and develop a strategy that aligns with your risk tolerance and financial goals.

General Advice Warning:

The information provided in these articles are of a general nature only and do not take into account your individual objectives, financial situation, or needs. You should consider whether the information is appropriate for you, having regard to your personal circumstances. Before making any financial decisions, we recommend consulting a licensed financial adviser to assess your specific needs and circumstances.