Managing Your Debt is a Good Investment
One of the best investments you can make, isn't a traditional investment at all
If you are looking for ways to make your money go further, look first at what you owe rather than what you'd like to own. By paying less interest, you can increase your overall returns substantially. Smart debt management is a planning fundamental you shouldn't overlook.
The true cost of debt
While today's low interest rates make debt seem affordable, remember that unless the interest is tax-deductible (for example, you're borrowing to earn taxable investment income), you're using after-tax dollars to pay it off. A $10,000 loan at 4.8% may cost only $480 in interest in a year, but if you're in a 40% tax bracket, you'll need $800 in income to generate that amount after-tax. As a result, paying down nondeductible debt may be the best way to invest any extra cash on hand. In the example above, you would need an investment return of greater than 8%.
Otherwise, you'd be further ahead to use your savings to pay down your loan.
A CIBC advisor can take you through a number of scenarios to determine whether you're better off investing or paying down debt.
Consolidate and minimize interest
What if you're not in a position to pay off your existing debt? In this case, your goal is to pay as little interest as possible. A key strategy is converting high-rate debt into lower-rate debt.
For many consumers, moving credit card or higher-rate debt into a personal line of credit is a good option. The interest rate on a line of credit is usually significantly less than the rate on most credit cards. If the line of credit is secured by marketable assets (for example, your home or investment portfolio), the rate might be 1 or 2 percentage points lower still. For homeowners, the CIBC Home Power Line of Credit® allows you to use the equity in your home to secure a loan or line of credit and get an even better interest rate. A line of credit can be a convenient source of cash. You don't have to apply for a loan every time you need money.
For example, a Personal Line of Credit is a flexible borrowing solution that can be accessed whenever you need money, with interest only paid on the amount you use - and only for the amount of time you need to use it.
To explore other smart debt management strategies, please contact a CIBC advisor.