Financial planning is really about… strategies to reduce non-deductible debt

For any tax-paying client, there is a big difference between the price of non-deductible debt and the price of deductible debt. There are legitimate ways to assist clients to reduce the presence of non-deductible debt by using deductible debt to pay any expenses that the deductible debt is appropriate to.

AMP refer to this as ‘debt recycling’ and you can read their thoughts on it here. As it happens, ‘debt recycling’ is a misnomer. The debt is not recycled. One debt is removed and another is created. They are two different debts. The second debt is entirely new. But let’s not quibble – the AMP is better at developing strategies than it is at naming them. 

There would be nothing wrong with utilising the AMP’s thoughts to articulate a debt management strategy for your clients.

Practice Tip – How you Might Say this to Your Client

The following paragraphs can be used to suggest debt recycling with your client:

There is a big difference between the price of non-deductible debt and the price of deductible debt. Deductible debt is much cheaper and we recommend that you ensure that you use your deductible debt facility to pay any expense that that facility is appropriate for. This will free up as much of your cash flow as possible, and this freed up cash flow should be used to retire your non-deductible debt.

In this way, every extra dollar that you draw on your deductible debt will be offset by the repayment of an extra dollar of your non-deductible debt. The total debt will not be increased, but the mix of debts will. Because the after-tax expense of the deductible debt is lower, the fact that a larger proportion of your debt is now deductible makes the debt less expensive overall.

We stress that the deductible debt can only be used to pay expenses that are appropriate to be paid using that debt facility – basically, debt used to acquire or manage income-generating investments. It cannot be used for private purposes.

You can read more about this concept on the AMP website here.

The Dover Group