What if cash flow is not enough

Using your cash flow to repay debt is an obvious strategy.

However, for some people, that won’t be enough.

In this situation, their long-term investment strategy must address how that will reduce debt sufficiently.

Here are some examples of alternative debt repayment strategies.

Sell investments.Selling investments will help you reduce debt. However, the reason we buy investments is to build wealth and we hope to keep them for many decades to benefit from the power of compounding growth. As you would hope that you can more than double your return by holding an asset for an extra 10 years (i.e., 20 versus 30 years). Therefore, wherever possible, I prefer to develop a strategy that does not require any asset sales. That said, sometimes that is not possible.

Withdraw from super.You might be able to withdraw money from your super to reduce debt. Again, I typically like to avoid doing that, because super is so tax-effective in retirement (i.e., zero tax rate on a balance of up to $1.9 million per person). However, if you have more than enough super, then it might be safe to withdraw a lump sum.

Downsize your home.If you have accumulated a lot of equity in your home, you might be able to downsize it and use the equity to reduce debt. However, be careful with this strategy because I find that whilst people might downsize accommodation, it doesn’t often translate to a proportionate downsize in value thereby crystalising less equity. That’s because people often want to stay in the same area e.g., they might sell their family home for $3 million and buy a new townhouse costing $2.5 million.

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Jason Gwerder
Tuesday, 31 October 2023

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