High-wealth individuals are likely to encounter increased debt and risk in their financial lives, so it is critical to understand how to manage both in order to mitigate against their impact.
Debt, in its simplest definition, is a liability or obligation owed by one party to another and can be good or bad. Good debt has the potential to generate income, build capital value or help to build long-term wealth. Examples of good debt include business or investment loans and property mortgages. In some instances, good debt can be tax deductible, such as in investment loan for a share portfolio or an investment property. Because the investment will generate assessable income, the interest on the loan becomes tax deductible and can help an individual’s tax position at the end of the financial year.
Bad debt, on the other hand, is money borrowed to purchase rapidly depreciating assets and diminishes wealth over time. Examples of bad debt include car loans, personal loans and credit card debt. Non-deductible debt arises when borrowed funds have been used to purchase an asset that will not produce an assessable income or grow capital value. The interest on the loan is therefore not tax deductible. Because bad debt is a direct drain on cash flow and produces no tax benefits, it should be cleared to optimise the individual’s financial position.
Risk is defined as the exposure to the possibility of loss. Insurance can act as a means of protection against financial loss and comes in many forms such as life insurance, income protection insurance and trauma insurance. Ensuring that relevant insurances are in place is essential to financial security and protecting one’s lifestyle, business and retirement plans. Many banks will extend their credit approval terms to higher limits if they have the security of a life or income policy in place to protect their exposure. Insurances offer financial freedom in the case of injury, critical illness or death and set the foundation for a strong wealth creation strategy.
At Abbotts, we specialise in loan structuring and brokering and possess decades of experience to assist you with your debts and insurances. Get in touch to learn how we can help with your loans, borrowing and debt management, and provide substantial positive value to your financial life.