One question I am asked a lot is: What debt should I pay off first?
This is a great question to get because it usually means someone is earning a bit of extra cash.
This might be from a substantial profit from a one-off job, or accumulated reserves built up over a period.
If you've decided that you want to use that extra money to pay down debt - what debt should you repay first?
The hire purchase payments on gear and machinery, or your mortgage or the credit card?
There is no one size fits all answer and I'd recommend reviewing your options with a professional. For the sake of discussion about how to approach this here's what I think.
First of all confirm your position - make sure you have planned and accounted for all operating bills paid and taxes provided for.
There's good debt and bad debt so assess these. Good debt is tax deductible debt, good debt is also cheap, flexible, easy to obtain and the interest rates and payments are fixed - you may want to keep this as debt.
Bad debt may not be tax deductible, have high or moving interest rates.
Pay off the bad stuff first. Credit cards have really high interest rates - make these a priority to pay if you have them.
Other than the ability for claiming a deduction for mortgage interest as home office most of this debt is not tax deductible.
Drop a lump if possible on your house mortgage, especially if you have a portion that's a flexi type mortgage.
If your mortgage is fixed you'll need to talk to your bank but you may be able to drop up to 5 per cent on your fixed mortgage portion.
Business loans and hire-purchase deals for gear you use in your work may be the last thing to repay - this debt is good debt, but nothing is better than being debt-free.
- Jeremy Tauri is an associate at Plus Chartered Accountants
By Jeremy Tauri
Phone: (09) 438 3322
Fax: 438 8455
134 Bank Street, Whangarei
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