Good Debt vs Bad Debt

Good Debt vs Bad DebtWhen it comes to debt, there is the misconception that all debt is bad.

Not many people understand the concept of “Good Debt” vs “Bad Debt”.

When settling debt is not the best idea

The Home Owner:

A medical practitioner with R300 000 in spare cash consulted with us. He thought it would be a good idea to add this to his Home Loan account to settle the bond faster. However, we advised him against this. His bank was charging him 9% on the loan. In the first year, he would have saved R27 000 in interest.

  • R300 000 x 9% = R27 000

We pointed out that he should consider adding these funds to a Retirement Annuity, as it would earn him a Tax Rebate of 42% from SARS.

  • R300 000 x 42% = R126 000

This is a considerably better return than he would have received if he had opted to settle his debt.

The Investment Property Owner:

She owed R450 000 on an apartment that earned her R10 000 per month in rental income. Debt bothered her, and she was contemplating settling the bond outright. Had she done so, her taxable income for that year would have increased by R47 250.

This clearly wouldn’t have been the best option as it wasn’t tax efficient for her.

Ideally, before deciding to settle debt, you should consult with your Financial Advisor. They should be able to help you determine if it would be in your best interest. At Northwood Financial Services CC, we offer our clients Holistic Financial Planning that considers every aspect of their portfolio. Yet another reason you should consult with us before making any major financial decisions.

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