What does it actually mean when you hear people talking about pre-tax and after-tax dollars?
As an employee you earn wages which are taxed (PAYE), so when you spend your wages you are using “after-tax dollars”. If you earn $50,000 before tax your effective tax rate is 17.4%. This means you need to earn $1.20 for every $1 that you spend after you have paid your tax.
But how about those pre-tax dollars? If you are a sole trader, a property investor or a business owner in any form, then the income you earn through this business is available to spend on business costs. So, $1 earned can pay for $1 cost.
What can you do to make the most of your dollars? If you have personal debt then talk to your tax adviser. You may find that you are able to restructure this debt into your business. By switching your personal debt into your business (where there is a valid reason for doing so) you will be able to pay off your personal debt faster.
The key when doing this debt restructuring is to get good accounting tax advice, and then work with a mortgage adviser. Structuring the debt so that your repayments are prioritised to paying down your personal debt before you tackle your investment debt will ensure that you get the best out of your money.
A mortgage adviser will help you to structure the debt in a manner that will mean that your repayments can fit within your existing cashflow. Often getting the debt structured cleverly can even speed up the process of repaying your personal debt.
Some of you will be reading this and thinking “Well, I don’t have a business so I guess that’s not going to work for me”. That’s not necessarily the case! We can talk to you about your options, perhaps owning a business or investment property is achievable and you just don’t know it yet. Please get in touch with us if you are keen to know more about the benefits, and how we can get you paying off your personal debt faster.