Debt is Like Cholesterol

by John Tutt on April 13, 2010

If you are like me and in your forties (or older) you will no doubt have had your doctor check your cholesterol. I’d always thought that cholesterol was a bad thing but it seems that is not necessarily the case.

You see, cholesterol comes in both good and bad forms. LDL (or low density lipoprotein) is the bad cholesterol. It travels around in the bloodstream and can slowly build up in the arteries, causing blockages to the heart and potentially causing a heart attack.

HDL is known as the ‘good’ cholesterol because high levels of HDL seem to protect againstheart attack. Medical experts think that HDL tends to carry cholesterol away from the arteries and back to the liver, where it’s passed from the body.

So what has this got to do with debt, I hear you ask. Well debt can come in both good and bad forms as well. Non-Deductible debt is essentially your bad debt or, to complete the analogy, your LDL cholesterol. Most of of us have some in the form of a mortgage, personal loan or credit card debt. A little bit won’t kill you but your adviser (financial doctor) should keep an eye on it.

Tax-Deductible debt is the equilavent of your good cholesterol. Why is it good? It can improve your financial health. Deductible debt offers some great benefits.

1.) The interest payments on this debt are generally tax deductible, meaning that you are paying less income tax.

2.) By borrowing to invest, you have a larger asset working for you. this can mean that you will achieve your financial goals sooner.

3.) Using debt increases your leverage. If you invest $30,000 of your own funds and get a 10% return, that’s a profit of $3,000. Nothing to sneeze at. But if you invested your own $30,000 and borrowed an additional $70,000 as well, your 10% return would net you $10,000. Which is a 33% return on your invested capital. A much nicer result, I think you would agree.

So, back to the cholesterol. How do we minimise our LDL and optimise our HDL? Luckily, its generally not too difficult. Eat the right foods and exerecise for starters. Sometimes you need to go on medication. Either way, you will need to make regular trips to the doctor.

What about minimising my Non-Deductible debt and achieving the optimal level of Deductible debt? You won’t have to exercise but you will need to do a budget. And you will need a debt recycling strategy. And most importantly, just like with cholesterol, you should visit your adviser (financial doctor) to make sure you stay on target.

If you would like to speak with an adviser on debt recycling strategies, click here and we will contact you.

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