Direct your Tax Savings towards Debt Reduction

Following our recent article on the upcoming tax changes from 1 July 2024 found here, we’ll explore the benefits of utilising your tax savings to reduce your debt.

Benefits of Debt Reduction

There are several benefits of directing your tax savings towards your debt. These benefits aren’t just financial and may include:

1. By accelerating your debt repayments, you are reducing the total interest cost over the life of your loan.

2. Reducing debt provides a level of financial freedom, by freeing up cash flow that was previously allocated towards debt repayments. These payments can be redirected towards other financial goals including saving, investing, building an emergency fund, or additional spending.

3. Being able to demonstrate a consistent level of debt reduction may increase your borrowing capacity when applying for future finance.

4. Having debt may be emotionally draining. By putting in place a regular debt management strategy, you gain the peace of mind in knowing you are working towards becoming debt-free.

5. High levels of debt increase your financial loss in the event of unexpected events (think job loss, ill health or medical expenses). By building up a buffer or redraw, you put yourself into a position to better manage unforeseen expenses.

Prioritising Debt Reduction

Once you have determined you’ll direct some or all of your tax savings towards your debt, the next step is to prioritise the order you reduce this debt. Some strategies may include:

1. Reducing your highest interest rate debt first – this strategy reduces your overall interest costs to reduce your loan term and create financial freedom sooner.

2. Smallest balance first – by focussing on paying off smaller debts first, you’ll have achieved your first ‘win’ whilst freeing up cash follow to direct to other debt.

3. Debt Consolidation – There may be benefits to consolidating smaller or high interest debts into a single loan for ease of management or to reduce your interest rate.

4. Tax Considerations – Consider reducing your non-tax deductible prior to reducing your tax deductible debt, to maximise your tax deductions.

If you feel as though a debt reduction strategy may be appropriate or would like to explore whether this is an appropriate option for you, feel free to reach out and discuss with us further.