Can you put a dollar value right now on exactly how much debt you owe? If you are like most Australians, the numbers are possibly a little fuzzy. There are so many types of debt - home and investment property loans, business loans, credit cards, store cards, current balances on utility accounts, buy-now-pay-later arrangements - just to name a few! It’s no wonder that debt management is a struggle for many business owners.
The first principle of debt management
As small business accountants, we often encounter people who have no clear picture of exactly how much they owe. You may have multiple credit cards and purchased items on “buy now, pay later” arrangements, and not be fully aware of exactly how much they add up to in terms of interest and fees.
The first step to sort out your debt is to build a complete and accurate picture of your debt:
- what you owe to whom
- which debts need to be be paid off first
- how the debt is structured
- what the repayment terms and costs are
It is also important to consider which debts relate to business or professional expenditure, and whether the interest and other charges associated with those debts is tax-deductible.
In making a debt management plan, any good small business accountant will tell you that paying down the debts that cost you the most and are not tax-deductible should be a priority.
How your small business accountant can help you find the right home
The single largest debt most Australians incur in their lives is the mortgage for a family home. Most people consider buying a house an investment, and therefore a good, or necessary, debt to have. Given the alternative to owning a house is renting, which is short-term and insecure, getting a mortgage for a family home is an essential debt.
But have you ever talked to your small business accountant about your mortgage? Did you seek their advice before purchasing a family home?
While property commentators usually discuss housing in terms of investment value, we take a slightly different view. Yes, it is an investment but it is also a debt, and before entering into such a significant financial commitment, it is worth talking through the fine detail with a small business accountant who understands your current situation and your plans for the future of your family.
Forget the benchtops and the suburb price comparisons for a moment and think about what it is you actually need from a home. Where do you need to be so you have work/life balance? How many children do you plan to have, and where will they go to school? How much space do you really need? Is a large garden important, or are you a family that would rather be in the heart of the city?
There are also different ways to structure debt. Your accountant can look at your full financial portfolio and evaluate options to fund your mortgage with your existing assets. Understanding how much debt is right for you and which structure will maximise your
Going deeper into debt to purchase a home that is not exactly what you need purely because it appears to have more potential as an investment is a high-risk proposition. Property values can fall, market bubbles can burst and suburbs can go out of style. Also if it isn’t right for you and your family you miss out on the priceless return on investment of being happy at home!
By taking the time to explore what you really need and want and what the options are, your small business accountant can help you decide on a mortgage that is right for you and works with your overall debt management plan.
Discuss good debt with your small business accountant
Property is not the only form of investment that people go into debt for. There are many other reasons people obtain finance including for investing in stocks and shares, investing in expanding their business, or investing in developing new products and services.
Your small business accountant should have a clear picture of what your goals are for your business and how it contributes to your personal wealth creation plan. If they don’t - you may need to start the conversation by asking them for advice about your overall debt management strategy.
Try asking, “Are there any ways to increase my returns on my various current investments with the use of debt and without debt?”
Once you have a clear picture of the potential risks and rewards of leveraging debt for investment purposes, you can then start to make some solid plans for a secure and low-debt future.
To learn more about debt management and ways your small business accountant can help you secure your future, download our free eBook ‘Your Money, Your Choice - Make Money’