Module Four Debt Recycling · 2018-10-24 · 2/14/18 2 Credit Cards It’s very simple, Credit...

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2/14/18 1 Module Four Debt Recycling Good Debt VS Bad Debt GOOD DEBT • Income producing • Tax Deductible BAD DEBT • Not income producing • Not Tax Deductible VS Credit Cards https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock

Transcript of Module Four Debt Recycling · 2018-10-24 · 2/14/18 2 Credit Cards It’s very simple, Credit...

Page 1: Module Four Debt Recycling · 2018-10-24 · 2/14/18 2 Credit Cards It’s very simple, Credit Cards allow your clients to spend money they DON’T HAVE! Credit Cards are Financial

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ModuleFourDebtRecycling

GoodDebtVSBadDebt

GOODDEBT• Incomeproducing• TaxDeductible

BADDEBT• Notincomeproducing• NotTaxDeductible

VS

CreditCards

https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock

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CreditCards

It’sverysimple,CreditCardsallowyourclientstospendmoneytheyDON’THAVE!

CreditCardsareFinancialQuicksandIfyouseeaclientwitha$10,000creditcarddebtthisshouldbealarmbellsforyou- Itsaystheyhavespent$10,000morethantheyearnt.TheyneedMoneyManagementandCashflowCoaching!

AtCrownMoneyManagement,wehaveafetishforcuttingupCreditCards.Itisatrulyfreeingexperienceforourclients…youshouldgiveitagowithyours!

CarLoans

Ifyoubuyanewcar,everytimeyoudriveityoushouldrolldownthewindowandthrowa$100noteout– thisishowmuchyoulosejustindepreciation!Carsloseonaverage70%oftheirvalueinthefirst4years.

Mostcaraccidentshappenontheshowroomfloor.PrettymuchthedumbestfinancedecisionyoucanmakeisBORROWINGtobuyaNEWcar.

Nevergetintodebtforaliabilitythatislosingvalue,onlyforthingsthataccumulateandgrowinvalue.DrivethecheapestcaryourEGOcanafford.

Novatedleases=novatedfleeces.Neverbuyanythingthat’ssoldtoyouonataxdeduction!

Consolidate

Step1- Consolidateallpossibledebtsintoyourclient’shomeloan

ToDoThis:-• Theywillneedtohaveequityintheircurrentproperty• Theywillneedtheincometoservicethehigherdebt

Note:Ifbyincreasingtheirhomeloantheywilltaketheirloantovalueratioover80%,andthereforehavetopaymortgageinsurance,it’simportanttodoacalculationtoensuretheamounttheywillpayinmortgageinsuranceisnotgreaterthantheinteresttheywillsavebyconsolidating.

Whydothis?• Usuallytheirhomeloanwillbethelowestinterestratethey’llbeableto

obtainforfunding,drasticallyreducingtheamountthey’llbepayingininterest

• Consolidatedowntoonerepaymentinsteadofseveral,thisiseasierforyourclienttofocuson

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BalanceTransfer

Step2– DoaBalanceTransferonanycreditcardsthatcan’tbeconsolidated

ToDoThis:-• Theywillneedtoapplydirectlywiththecreditcardprovider• Onceapproved,themoneywillbetransferredtotheoldcreditcard,bringingittoa$0

balance• Itisthentheclient’sresponsibilitytoCUTUPtheiroldcreditcard,andclosethefacility

down• Itisimportanttothenworkoutaplanwithyourclienttopayoffthebalancetransferdebt

beforethe0%interesttermexpires.Thisiseitherdonebysettinguparegularmonthlytransfertothecreditcard,orbyaccumulatingthosefundsintheclient’sredrawontheirhomeloan

Note:ItisESSENTIALthattheclientcutsuptheiroldcreditcard.Alltoooftenwe’veseenaclientgothroughwithabalancetransfer,thencontinueusingtheiroldcreditcard.

Whydothis?• Somecreditcardcompaniesoffer18-24month0% InterestRateoffersondebttransfers

fromothercreditcards,allowingtheclienttosolelytargettheprincipalonthisdebt

CashFlowIndex

Step3– ImplementaCashFlowIndexprogram

ToDoThis:-• Workoutthe“CashFlowIndex”foreachofyourclient’sdebt– Dividetheloanbalanceby

themonthlypayment

• ThedebtswiththeLOWESTindexaretheleastefficient,andshouldbepaidofffirst.Thiswillreleasethemostamountofcashflow toputtowardsotherdebtsthefastest

• Anydebtswithanindexover100areefficient,andcanbeleftwheretheyareuntilallotherdebtsarepaidoff

Note:TheCashFlowIndexisthemosteffectivewayofidentifyingthefirstdebttobepaidoff.Thealternativesare“DebtSnowball”wherebyyoupayoffthelowestdebtfirsttocreatepsychologicalmomentum,and“Landslide”whereyoupayoffthehighestinterestratedebtfirsttosaveinterest.

Whydothis?• It’sessentialtoputintoplaceaplanforpayingoffalldebtsthataren’tthehomeloan!The

trickistofindtheright“priority”,tomakesuretheclient’smoneyisbeingusedmostefficiently

Scenario

MostEfficient LeastEfficient

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Iwanttoinvest(butdon’thavethemoney)

Theeasiestwaytobuildyourfundsundermanagementistousetheequityinyourclients’home,becausemostpeopledon’thavethecash!

DEBTRECYCLING- thisiswhereyoudon’tjustpayoffyourmortgagebutyourecyclethedebtanduseitasaninvestmenttool.Itmeansusingthedifferencebetweentheamountyourclientowesontheirmortgageandthevalueoftheirhousetopotentiallyreducetheirmortgageatthesametimeasbuildingasizeablenestegg.

OwnerOccupieddebtisconsidered“BadDebt”becauseitisnottaxdeductible,andearnsyounoincome.

Investmentdebtisconsidered“GoodDebt”becauseitIStaxdeductible,andearnsyouincome.

DebtRecycling

Theeasiestwaytobuildyourfundsundermanagementistousetheequityinyourclients’home,becausemostpeopledon’thavethecash!

DEBTRECYCLINGiswhereyoudon’tjustpayoffa mortgagebutyourecyclethedebtanduseitasaninvestmenttool.

Itmeansusingthedifferencebetweentheamountyourclientowesontheirmortgageandthevalueoftheirhousetopotentiallyreducetheirmortgageatthesametimeasbuildingasizeablenestegg.

Manypeoplethinktheyhavetopayofftheirmortgagebeforetheycanspareenoughmoneytoinvest.Theproblemwiththisideaisthatifyoudothat,itmighttakesolongthatyouwon’thaveenoughtimeleftforyourinvestmenttogrowandmature.Yourbestallywithinvestingistime.Thisstrategycanhelpyoumakethebestofbothworlds.

BenefitsvsConsiderations

• Startsthewealthcreationprocessimmediately,allowingforlongtermgrowthofinvestments

• Replacesnondeductibledebtwithtaxdeductibledebtonaregularbasis

• Helpsyoureachyourlifestylegoalsfaster

• Diversifiedinvestmentportfoliooutsidethefamilyhome

• Takesadvantageofdollarcostaveragingintothemarket

• Liquidasset

• Increasedriskduetoexposuretomarketvolatility

• Capitallossesforgearedinvestmentsarepotentiallymagnifiedcomparedtonon-gearedstrategies

• Duetothehighlevelofdebt,employmentsecurityisespeciallyimportant

• SuitableforBalancedinvestorsataminimum

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DebtRecyclingDiagram

HomeLoan

InvestmentLoan

Equity

“BADDEBT”Nontax

deductibledebt

“GOODDEBT”Taxdeductible

debt

Aslongasyouarereceivingabiggerreturnonyourinvestmentthanyou’repayingininterest,thenthisisasmartfinancialstrategy!

CaseStudy- DebtRecycling

• Takethetotaldebtto80%LVRmaxtoavoidMortgageInsurance• Figuresareestimatesonly

Dothenumbers!

Leverageandtheuseofitisexceptionallybeneficialifit’susedoveralongtime,

ifit’susedoverashorttimeit’sexceptionallydangerous!

Dothenumbers,makesureit’sworthitfortheclient.Needtotakeintoaccountthetaxpayableonthe

investmentreturn.

Youcanpotentiallylooktofixininterestratestogivealevelofprotectionforthestructure.

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RateReducer

AHomeLoanwhereyourclient’sinterestratereduceseveryyearwiththeirloanbalance!

Currently,yourclient’sowneroccupiedloanandinvestmentloanwillhavesimilarrates,butwithonesignificantdifference- theinterestontheirinvestmentpropertyisprobablycompletelydeductibleattaxtime.

WiththeATOproductruling(PR2017/6),we’reabletorebalancetheirloaninterestrates,reducingthehomeloanrateandincreasingtheinvestmentrate.Bydiscountingtherateontheirhomeloantoaslowas2%*,theywillbeabletopayifoffmuchfaster,asmoreoftheirrepaymentswillbegoingtowardspayingdowntheirprincipal.

Ifthey’rebuildingtheirportfolioandaddingmoreinvestmentproperties,theirhomeloanratecoulddecreaseevenfurthersotheycanowntheirhomesooner,savingthousandsofdollarsoverthelifeoftheirloans.

TraditionalLoanStructure

RateReducerStructure

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RateReducerCaseStudy


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