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Speaker 1: Start here. We're really nervous about debt recycling? How do

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Speaker 1: we do this safely with no regrets? Good morning, everyone,

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Speaker 1: and welcome back to start Here, the mini series within

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Speaker 1: Sugar Mama's Fireplay where I answer your real life money

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Speaker 1: questions with practical, empowering steps to help you move forward

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Speaker 1: with clarity and confidence. Now, as always, everything in these

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Speaker 1: podcasts and all of my other content is general in

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Speaker 1: nature and for educational purposes only, so please bear that

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Speaker 1: in mind. But moving on to today's question, because it's

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Speaker 1: a great one. As always, here we go, Hi, Canna.

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Speaker 1: I've been sitting on the sidelines thinking about a debt

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Speaker 1: recycling strategy that you talk about in your book Mindful Money,

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Speaker 1: and on this podcast, Sugar Mama's Fireplay. We are finally

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Speaker 1: ready to pull the trigger, but we are feeling really nervous.

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Speaker 1: Is there anything that you can recommend or that we

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Speaker 1: need to know that will help calm our nerves so

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Speaker 1: that we can see that this strategy will work? All? Right?

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Speaker 1: First of all, I love this question because the nerves

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Speaker 1: mean you really do care about this. Nerves mean that

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Speaker 1: you are taking this serious. Nerves mean that you are

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Speaker 1: not like blindly copying somebody else's financial strategy without thinking

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Speaker 1: about your own consequences, which is a really good sign.

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Speaker 1: So before we get into my seven rules around debt recycling,

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Speaker 1: I want to say something clearly. If you are not

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Speaker 1: feeling one hundred percent comfortable, do not proceed. Higher risk

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Speaker 1: strategies most often require much higher levels of understanding and conviction.

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Speaker 1: And sometimes when you research more, you feel more calm

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Speaker 1: and you feel more ready, which is great. But sometimes

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Speaker 1: when you research more, you realize, actually, I understand it now,

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Speaker 1: and this isn't actually right for me or for me

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Speaker 1: right now. You know, both outcomes are smart outcomes. What

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Speaker 1: we don't want is fear because you don't understand. But

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Speaker 1: it is also completely normal to feel nervous when doing

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Speaker 1: something new with money for the first time, especially something

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Speaker 1: that involves debt and investing. So let's unpack this properly

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Speaker 1: together right now, starting here. So to go back to

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Speaker 1: the basics, let's talk about what debt recycling is and

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Speaker 1: how it works and why people do this. So debt

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Speaker 1: recycling is like a fairly sophisticated financial strategy where you

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Speaker 1: pay down your non deductible home loan, but then you

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Speaker 1: redraw that typically same amount or still amount as a

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Speaker 1: separate investment loan. So for example, you have a home

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Speaker 1: with a million dollars, you've got to say, six hundred

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Speaker 1: thousand dollars worth of equity, and you know, because you

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Speaker 1: have a four hundred thousand dollars home loan, you might

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Speaker 1: say borrow one hundred thousand dollars against the home, So

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Speaker 1: you are increasing your overall debt. And you take that

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Speaker 1: one hundred thousand dollars and you invest it into income

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Speaker 1: producing assets such as a share portfolio or you know,

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Speaker 1: buying a small property, and you gradually convert the non

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Speaker 1: deductible debt into tax deductible investment debt over time. And

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Speaker 1: the ultimate goal is to reduce your home loan faster,

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Speaker 1: build an investment portfolio, and diversify out of the passive

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Speaker 1: income and obviously start earning a passive income for financial

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Speaker 1: independence and potentially improve your long term tax efficiency, not

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Speaker 1: that that should ever be the only reason you do this,

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Speaker 1: and of course accelerate your wealth creation journey. And also

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Speaker 1: people like this because it means they are less reliant

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Speaker 1: or controlled by superannuation for financial dependence, particularly if you

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Speaker 1: plan on retiring before preservation age, where you can not

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Speaker 1: necessarily access your super when you want to. But let's

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Speaker 1: be clear, debt recycling is definitely not a hack. It's

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Speaker 1: not a shortcut. It's leverage, and leverage magnifies outcomes, both

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Speaker 1: good and bad. So if you are feeling nervous, that's healthy.

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Speaker 1: Now I want to give you my seven rules for

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Speaker 1: debt recycling the right way, because de recycling is something

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Speaker 1: I've been doing for the last oh twenty years, I

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Speaker 1: think almost, and these are the guidelines that I have

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Speaker 1: personally followed that have really helped reduce the risk and

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Speaker 1: the stress and actually got my investments paying for themselves

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Speaker 1: to the point where one of my portfolios is actually

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Speaker 1: owned completely outright because I stood it up correctly the

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Speaker 1: first time. So I'm going to share with you everything

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Speaker 1: about a strategy I'm really passionate about for the right people,

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Speaker 1: at the right time, for the right reasons. So rule

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Speaker 1: number one is no toxic debt and sufficient emergency money

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Speaker 1: before you even think about debt recycling. You should not

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Speaker 1: have any credit card debt. You should not have any

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Speaker 1: buy now, pay later debt, and no personal loans like

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Speaker 1: car loans. If you are still carrying that high interest

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Speaker 1: consumer debt. You are layering risk on top of risk

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Speaker 1: that is not strategic. That is just compounding stress in

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Speaker 1: my opinion. And secondly, emergency money and not just like

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Speaker 1: a token amount or a generic formula. You need sufficient

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Speaker 1: emergency money for obviously the living expenses, your current debt levels,

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Speaker 1: and of course your new increased debt exposure. And this

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Speaker 1: protects you from things like a change in your job situation,

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Speaker 1: medical emergencies, dental emergencies, interest rate spikes, you know, market downturns.

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Speaker 1: Perhaps you have like an investment property that's in between tenants.

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Speaker 1: You know, there's real risks in your real, every day

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Speaker 1: life that no one is immune from. Because the worst

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Speaker 1: possible scenario in debt recycling is being forced to sell

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Speaker 1: investments at a loss because you can no longer service

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Speaker 1: the loan. And if emergency money isn't solid, press pause.

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Speaker 1: Please focus on building that emergency money as a priority

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Speaker 1: before you begin, all right, Rule number two and that

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Speaker 1: is strong cash flow and debts still reducing because you

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Speaker 1: are taking on more debt. Here, you need to know

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Speaker 1: that you can comfortably service both the loans, both your

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Speaker 1: existing home loan and the new investment loan. And you

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Speaker 1: also want to see that your home loan is still reduced,

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Speaker 1: maybe not necessarily at as fast a rate, because you've

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Speaker 1: got this new debt to service, but it's still actually

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Speaker 1: coming down ideally faster than the bank's prescription. You know,

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Speaker 1: you don't want your overall debt. Just like platauing. The

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Speaker 1: purpose of this is to convert and reduce your debt

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Speaker 1: over time, and you should also stress test your cash flow.

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Speaker 1: You know, could you handle an interest rate rise of

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Speaker 1: say up to two to three percent or even higher.

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Speaker 1: Could you handle a change in unexpected expenses? Could you

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Speaker 1: handle a temporary drop in income, like especially if you

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Speaker 1: shifted to one income to raise a family, or to

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Speaker 1: take time out to do some additional studies, or maybe

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Speaker 1: care for a family member. Could you still afford to

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Speaker 1: hold both the loans and see them slowly and steadily

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Speaker 1: reducing and working for you. If the answer feels tight,

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Speaker 1: maybe look at borrowing less, not that full one hundred

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Speaker 1: thousand dollars, perhaps fifty thousand or even eighty thousand. Also,

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Speaker 1: on that note, you do not need to draw down

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Speaker 1: the maximum amount, even though a loan may be even

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Speaker 1: approved for say one hundred thousand dollars, you can actually

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Speaker 1: start with smaller amounts just by drawing less. So for example,

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Speaker 1: you might just draw down twenty thousand dollars initially to

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Speaker 1: invest in twenty thousand dollars with the shares. And of

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Speaker 1: course at any stage you can speak to your mortgage

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Speaker 1: broker and increase that loan further down the track, particularly

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Speaker 1: as you feel later in life maybe more stable. There's

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Speaker 1: more equity and you've got a greater sense of education

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Speaker 1: and financial confidence behind you backing you. And there is

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Speaker 1: no prize for rushing this, particularly a high risk strategy

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Speaker 1: like this. All right, rule number three, and that is

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Speaker 1: expert advice. This is not a DIY strategy. Det Recycling

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Speaker 1: is not something I recommend being set up alone. The

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Speaker 1: structure matters enormously. You need to have a separate investment loan.

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Speaker 1: It's completely split and separate, so it's really clear when

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Speaker 1: it comes to tax time exactly how much money you've

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Speaker 1: spent on interest and that is deductible, and of course

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Speaker 1: the income coming in from those investments. You also need

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Speaker 1: to have a really clean tracing of those borrow funds.

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Speaker 1: The correct tax structure. Perhaps you put it in one

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Speaker 1: per person's name or your name or you split it

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Speaker 1: between the two. So the ownership is really really important.

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Speaker 1: And of course the investment purpose, what is the goal

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Speaker 1: behind this? Is it to build a long term growing

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Speaker 1: passive income stream, or perhaps is more capital growth focus,

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Speaker 1: and you're planning on turning that one hundred thousand dollar

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Speaker 1: alone into a three hundred thousand dollar investment portfolio. You

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Speaker 1: plan on selling it all down and sweeping it against

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Speaker 1: the mortgage, like know what your ultimate goal is and

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Speaker 1: purpose behind a debt recycling strategy, of course, and you

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Speaker 1: should always be written down. And if this is set

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Speaker 1: up incorrectly, it is really messy and really expensive to fix.

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Speaker 1: So you need an experienced mortgage broker that specializes in

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Speaker 1: this type of debt and setting it up. If you

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Speaker 1: don't have anyone, send me a dal on Instagram and

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Speaker 1: I can send you my mortgage broker's details and know

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Speaker 1: there is no incentive for me to recommend him other

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Speaker 1: than the fact he's very good and he'll take good

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Speaker 1: care of you. And of course, an experienced financial planner,

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Speaker 1: a financial planner that is actually focused on helping people

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Speaker 1: in this wealth accumulation phase of their lives. I would

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Speaker 1: not recommend seeing a financial planner that specializes in retirement

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Speaker 1: planning or center link. You need someone who knows the

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Speaker 1: nitty gritty details of this type of strategy and how

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Speaker 1: to set it up correctly and the best investments for this.

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Speaker 1: So again, if you don't have any ones to speak

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Speaker 1: to and need some numbers and names, send me a DM.

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Speaker 1: I'll give you all of those. It's no problem at all.

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Speaker 1: And ideally you want to make sure that the financial

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Speaker 1: planner and the mortgage broker know each other and they're

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Speaker 1: seeing you off the same page, and they know how

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Speaker 1: to communicate together and they know how to communicate with you,

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Speaker 1: so that you're all working together and it's going to

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Speaker 1: work for you. That is pretty much a non negotiable.

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Speaker 1: And the Borot funds, I should say when you're speaking

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Speaker 1: with that financial planner, must be invested in income producing

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Speaker 1: assets with long term growth potential. This is really important

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Speaker 1: when it comes to the tax deductibility. If, for example,

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Speaker 1: you borrowed one hundred thousand dollars you and bought a

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Speaker 1: block of land, and that block of land is not

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Speaker 1: rented out, it doesn't generate any passive income, you can't

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Speaker 1: actually claim the interest of your tax, so you could

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Speaker 1: get yourself into quite a pickle. Again, this is why

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Speaker 1: you go and see a financial planner. Also, you want

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Speaker 1: to be thinking about high growth or growth asset allocations. Yes,

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Speaker 1: they're going to be volatile, but the volatility is actually

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Speaker 1: what's going to help that compounding growth opportunity workview where

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Speaker 1: the portfolio actually over time exceeds the cost of the loan.

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Speaker 1: And if you don't know where to start, please go

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Speaker 1: and see a financial planner. But before you do that,

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Speaker 1: go and read my book Mindful Money and one thousand

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Speaker 1: dollars Project, so that you're already are heading in the

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Speaker 1: right direction when it comes to picking the ultimate investment

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Speaker 1: portfolio for yourself. All right. Rule number four and that

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Speaker 1: is personal insurance is a non negotiable. I feel really

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Speaker 1: strongly about this. If you increase debt without adequate protection,

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Speaker 1: you are exposed and this is dangerous and it's completely

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Speaker 1: avoidable and unnecessary. Income protection is critical if you cannot

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Speaker 1: work due to an illness or an injury, this strategy

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Speaker 1: unravels very quickly. And whilst you're looking at income protection,

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Speaker 1: make sure you're review your life cover, your TPD cover

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Speaker 1: and if you haven't done already, your trauma cover. Make

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Speaker 1: sure the cover reflects though the new debt level. Debt

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Speaker 1: recycling without protection is like building a house without any foundation.

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Speaker 1: It's going to fall apart very quickly, and it's going

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Speaker 1: to be very expensive to put back together again. Debt

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Speaker 1: recycling without protection is like building a house without any foundations.

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Speaker 1: When a storm comes your way, it can do a

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Speaker 1: lot of damage very easily, which is expensive and lengthy

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Speaker 1: to fix. Rule five. Loan structure matters. Typically the investment

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Speaker 1: loan is initially structured as an interest only loan. Why well,

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Speaker 1: because it allows you to focus on extra payments on

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Speaker 1: your home loan and accelerate the conversion of non deductible debt. However,

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Speaker 1: this isn't necessarily permanent. There may come a time and

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Speaker 1: this is what happened to me with one of my

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Speaker 1: loans where the rate difference between the interest only rate

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Speaker 1: and the principle and interest rate started to narrow. And

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Speaker 1: it is also where your risk tolerance might start to shift.

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Speaker 1: You might become perhaps more conservative. And these are the

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Speaker 1: two things that happened to me. I had another baby,

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Speaker 1: and I also could see that it was actually more

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Speaker 1: sensible and wise and in an alignment to my goals

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Speaker 1: to actually switch the investment loan to a P and

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Speaker 1: I loan and switching to principle and interest. You know,

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Speaker 1: when it's done correctly, it can actually help reduce your

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Speaker 1: overal risk, and it reduces that long term interest that

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Speaker 1: you're paying, and of course helps build equity faster because

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Speaker 1: you're paying down the principle and obviously the portfolio is

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Speaker 1: hopefully growing at a faster rate over time. And again

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Speaker 1: this is where that ongoing advice really does matter and

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Speaker 1: value both from a mortgage broker and a financial planner.

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Speaker 1: Debt recycling is never like a set and forget. It

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Speaker 1: evolves and it always needs a close eye. Rule number

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Speaker 1: six and that is managing the investment income wisely. When

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Speaker 1: the loan is set up, you do not have to

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Speaker 1: draw all the funds immediately, and I previously mentioned this

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Speaker 1: a couple of minutes ago, particularly with things like shares,

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Speaker 1: where you can actually draw it down in parcels and

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Speaker 1: invest in parcels, you know, and of course you're only

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Speaker 1: charge interest on what you actually draw. So just because

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Speaker 1: you've been approved for one hundred thousand dollar loan, you're

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Speaker 1: not immediately charged interest on that one hundred thousand dollars alone.

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Speaker 1: You're only charged interest on what you actually go and draw,

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Speaker 1: So that money could sit there for six months and

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Speaker 1: you're still not paying any interest. Is the moment you

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Speaker 1: actually start taking money out of that and start investing. Now,

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Speaker 1: when that investment income begins flowing in through dividends or

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Speaker 1: ran to whatever it may be, you have three options

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Speaker 1: with that passive income. You could use it to help

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Speaker 1: reduce your home loan faster. So say I own a

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Speaker 1: dividend of say a thousand, or I was I put

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Speaker 1: that towards my home loan if I wanted to, or

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Speaker 1: if I wanted to do, I could put that thousand

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Speaker 1: dollars towards the investment loan and helping service that investment loan.

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Speaker 1: Or perhaps if I wanted to, you could take that

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Speaker 1: thousand dollars. Or I could take that one thousand dollars

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Speaker 1: of passive income and reinvest it to help accelerate the

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Speaker 1: compounding growth opportunities. Whatever you decide to do, do not

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Speaker 1: spend it. Of course, get advice if you're not, and

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Speaker 1: if you're wondering, hey, what did you do? Canna, because

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Speaker 1: you've already mentioned that one of your loans has been

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Speaker 1: paid off completely and it's cash flow positive. Well, I

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Speaker 1: reinvested all of my dividends, and then I set up

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Speaker 1: my loans to be principal and interest, and every now

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Speaker 1: and again I chipped away at those principal and interest

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Speaker 1: loans that they helped pay themselves off, and one of

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Speaker 1: them actually now pays for itself and it's paying itself

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Speaker 1: off over time. It should be paid off within fifteen years.

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Speaker 1: But my point is, do not spend the passive income.

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Speaker 1: Investment income should build your wealth or be used to

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Speaker 1: help proactively reduce your investment and debt risk. As I said,

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Speaker 1: a financial planner can run all the different scenarios and

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Speaker 1: projections and you can compare the different strategies with you

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Speaker 1: using it to help pay off your home loan, using

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Speaker 1: it to help service the investment loan, or perhaps reinvesting there.

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Speaker 1: It is really quite interesting to see the different projections

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Speaker 1: and how they really do compare, particularly over a long

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Speaker 1: period of time. And yes, the strategy that you ultimately

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Speaker 1: pick will change over time. When I first got started,

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Speaker 1: I started off with an investment only loan, and then

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Speaker 1: I shifted one of them to a principle and interest

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Speaker 1: and then I started chipping away and I gues I reinvested,

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Speaker 1: but then occasionally I would take some dividends and put

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Speaker 1: it on those loans. It is not set in stone.

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Speaker 1: You will tweak it and evolve it depending on what's

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Speaker 1: going on in your life at that point in time.

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Speaker 1: And that's the great thing about having a financial putner

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Speaker 1: because they can guide you along the way. But the

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Speaker 1: principle remains the income must be used to help strengthen

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Speaker 1: the actual lying structure. And then finally rule seven, and

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Speaker 1: that is patience. Debt recycling is not an exciting like

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Speaker 1: year one strategy. It feels really slow, It feels really technical,

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Speaker 1: particularly when you first get started. It can feel like anticlimatic,

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Speaker 1: even regretful at times, like, oh my gosh, nothing is happening.

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Speaker 1: I don't feel any better of doing this. You know,

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Speaker 1: maybe we should just not Bother from personal and professional experience,

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Speaker 1: the magic of debt recycling tends to become way more

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Speaker 1: visible around years six, seven and now you might be

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Speaker 1: wondering why why you're six or seven that's forever. Well,

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Speaker 1: it's because the debts have started to reduce that little bit.

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Speaker 1: More and more equity has been built and compounding has

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Speaker 1: started to snowball, particularly with things that are quite volatile

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Speaker 1: and need time to actually grow, like shares and property.

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Speaker 1: And of course your financial confidence and level of financial

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Speaker 1: literacy has significantly grown in around year six and seven,

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Speaker 1: and that's where you start to see all the fruits

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Speaker 1: of your discipline. And it's not a get rich quick strategy.

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Speaker 1: It's a long term wealth architecture strategy, and as I said,

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Speaker 1: one that I've been doing for I think close to

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Speaker 1: twenty years. So let me say this gently. If you're

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Speaker 1: feeling nervous about debt recycling or you don't fully understand

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Speaker 1: it yet, keep learning, get to the bottom of it

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Speaker 1: so that you understand absolutely what you are getting yourself into,

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Speaker 1: the risk, the costs, and why, and how it reflects

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Speaker 1: back to your goals or perhaps not. And if you're

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Speaker 1: feeling nervous because it feels rushed, just slow down. You

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Speaker 1: don't have to do this tomorrow, next month, or even

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Speaker 1: this year. And if you're feeling nervous because somebody else

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Speaker 1: is doing it, well, step back. Comparison is not the

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Speaker 1: strategy here. It is all about clarity. You don't have

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Speaker 1: to debt recycle to build wealth. There are lots of

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Speaker 1: other things you can do, and in the meantime you

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Speaker 1: can just focus on paying off your mortgage. You could

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Speaker 1: look at perhaps salary sacrificing or setting up a regular

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Speaker 1: investment plan and investing gradually and building a passive income slowly.

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Speaker 1: Debt recycling is just one of the many tools available,

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Speaker 1: and of course it should always align with your goals.

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Speaker 1: It should always align with your temperament, your cash flow,

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Speaker 1: your risk tolerance, and your time frame at least ten years,

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Speaker 1: if not longer, not your fear of missing out. So

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Speaker 1: if you do choose to move forward, do it intentionally.

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Speaker 1: Tick off these seven rules, work with professionals. Stress test

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Speaker 1: your numbers and stress test them a few times. And

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Speaker 1: protect your downside. You know, move in stages, review regularly,

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Speaker 1: and of course stay patient and remember wealth built carefully

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Speaker 1: us so much longer and weathers all the natural storms

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Speaker 1: which are part of life. The goal is not fast wealth,

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Speaker 1: it's resilient, robust wealth that holds up under pressure. Now,

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Speaker 1: if this episode help calm your nerves because you've been

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Speaker 1: thinking about doing a det recycling strategy, can you please

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Speaker 1: go and share it with someone else who's thinking about

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Speaker 1: a strategy like this, And if you would like your

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Speaker 1: question answered in a future Star Here episode. Please send

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Speaker 1: me a DM on Instagram or just connect me with

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Speaker 1: the email address linked in the podcast notes. In the meantime,

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Speaker 1: I will see you next Monday morning on Sugar Mama's

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Speaker 1: Fireplay Chowel For now,