Debt Reduction Strategies?

Hi forum friends,

Is it generally accepted that the most effective debt reduction method which involves I/O repayments, redirecting all income sources into offset and living off long interest free credit cards?

I have seen this method talked of many times and not too many variations.

Im thinking about reducing debt to improve cashflow and am preparing.

What will/do you do?

Cheers,

Michael

 

I found in theory that was great but in practice the credit card component didn't work for our family.

We take out X amount of cash per fortnight for shopping etc. When we are running low on cash we know only to buy necessities and elimnate anything unnecessary until the next FN.

When we used credit it was too difficult to keep track of and instead of only doing 1-2 shops per FN we were doing 2-3 (we have 4 kids).

 

That's what I do

But also nearly set up to borrow to pay business expenses so that that money can pay down/or offset by non-deductible debt.

 

Credit cards need to be repaid at some point. When you say 'long interest free period' cards do you mean making the most of 55 day interest free periods or balance transfers?

If you pay off your credit cards in full at the statement date leaving money parked in your offset, yeah, that will minimise interest costs.

In my experience more often than not people don't manage their spending as well when living on credit cards and if you spend more than you otherwise would any interest savings will be chewed up. Same goes for lines of credit.

 

The optimal financial outcome is often incompatible with our behaviour.

 

The strategy is basically this:
- Get a low rate on main residence, IO ideally.
- 100% offset account
- divert all income, inheritances, robbery proceeds and rents into offset
- don't have other accounts and transfer money over cause you are wasting interest savings
- buy an investment property by setting up a separate loan x 2
- not use any cash for the investment property
- borrow to pay for investment property expenses, other than interest, Tax Tip 4: Borrowing to Pay investment expenses
- make sure you are claiming absolutely everything for your investment property
- get an income tax variation done so your weekly tax payable is reduced rather than waiting till the end of the year to get a tax refund (think compounding)
- Use an interest free credit card with points (if appropriate)
- keep your cash in the offset by using the credit card
- once the offset builds up consider paying down the PPOR loan
- then consider borrowing more money and further investing = debt recycling
- once property has grown in value you could sell and pay off PPOR debt

The idea is to get money in your offset as quick as possible and to leave it there are long as possible. leaving cash in there one day will save interest on interest on interest as interest is incurred daily and compounds as it is added monthly.


Once you have paid of the PPOR debt the strategy can be repeated on an investment property, except you generally would not want to pay down the debt. Offset accounts can be moved around to match taxable incomes of each spouse - better to have the offset on the property owned by the spouse on the lowest income. If this person has more than 1 property then the offset should be against the loan with the highest rate.

Once this offset is full, move onto the next one.

 

Great responses guys, thanks for all of the info!

@Terry_w is there an advantage to turning owner occupied loans to I/O in a debt reduction strategy? I can understand increased repayments helping to increase cash reserves in the offset, and therefore reduce interest, but doest it help if repayments are not higher than required?

Cheers

 

There can be an advantage in IO loans on PPOR, but a debt reduction strategy usually involves reducing debts!

The advantage is you can still save the same interest by keeping extra funds in the offset. The advantage is that you can use the offset funds to pay the loan down at any time - but this is also a disadvantage as you could use the funds to buy a gold plated toilet if you wished. Depends on your personality. Keeping funds in the offset will allow you to have a large deductible debt if you ever moved out and rented the place out.

 

live frugal.. work harder and longer.. save more . No magic formula

 

And smarter!

 

Who organises the variation? I'm looking to do this to increase Cashflow

 

Your accountant, if they're decent. I met an accountant who'd never heard of it

 

General gist, but none of those are really needed to make more money.

This is more like it.

 

Every single thing I can do to build as much equity as fast as possible.

People who have a large amount of equity find it easy to convert it to meaningful cash flow. It all starts with focusing on the right things when building a portfolio.

Just my opinion.

 

Or you can do yourself - it is not hard via the ATO website.

 

I expect my accountant would not have heard of that either. I use a national chain and I think I need to make the change to a "professional" accountant firm. Why did my accountant not tell me I should be getting a depreciation report carried out? they were, after all, the "property specialist accountant" in the building which carried a higher premium. only reason I still use them is I expect changing is too hard ( shakes head at his own stupidity ) Welcome any recommendation especially as we are growing now and hopefully again soon.

 

I have seen clients losing thousands of dollars per year because they are too worried about changing tax agents. Best to bite the bullet and start getting some good advice.

 

Getting paid monthly makes it a nightmare - seems to be getting more popular with employers

 

Random thought about interest being calculated daily... If I used the interest free CC strategy but also asked 4 friends to pay $100 into my offset every week and then repaid them $400 each at the of the month, would that dramatically reduce debt?

Playing around with online calcs but all the repayment ones seem to assume that extra $400/wk will stay stay in the account.