Not all debt is bad

Not all debt is bad

An easy read article on how to increase wealth through borrowing.

“Why would I want to grow my debt?” you may ask. “Skilled money managers do it all the time,” we might respond.

Many people at some stage during their life use debt to create wealth. However, to be a successful “debt grower” you first need to change your mindset from thinking debt is negative to thinking of it as a wealth creation vehicle.

Once the home mortgage is under control, some investors choose to establish a line of credit on their home. They can then diversify their portfolio by investing those funds in other assets such as direct shares, managed funds or other property. These investments increase taxable income with dividends, interest and/or rent.

This income can then be offset through tax deductions for:

  •         the costs of borrowing. Interest charges can only be a viable deduction when the line of credit or mortgage is for investment purposes.
  •         imputation credits from investing in Australian shares (either directly or through managed funds). Imputation credits are a credit for the tax that the company has already paid, ensuring investors are not taxed twice on the same income.
  •         management, depreciation and other allowable costs of an investment property.

Some people prefer to invest in shares and managed funds rather than an investment property because it’s easier to sell a few shares or part of a managed fund portfolio if cash is needed. There’s an old saying about when it comes to investing in property and suddenly needing some cash – “you can’t just sell a bathroom”.

Managed well, debt can increase wealth a lot faster than simply saving to invest but losses can also be higher if your investments fall in value. You should consider this option carefully and talk to a licensed professional before making a final decision.

So next time somebody asks you how your money tree is growing, you could reply, “I don’t have a money tree, but my debt tree is thriving!”