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