A PRACTICAL GUIDE TO MANAGING DEBT INTRODUCTION

WARNING THIS DOCUMENT IS PROVIDED BY THE AUTHOR (DIRECT FINANCIAL GROUP LTD) ON AN "AS IS" BASIS. THE INFORMATION CONTAINED IN THIS DOCUMENT IS GENERAL INFORMATION ONLY. IT DOES NOT TAKE INTO CONIDERATION YOUR PERSONAL OBJECTIVES, FINANCIAL SITUATION OR NEEDS. WE RECOMMEND SEEKING PERSONALISZED ADVICE PRIOR TO IMPLEMENTING ANY STRATEGY OUTLINED WITHIN THIS DOCUMENT.

INTRODUCTION Direct Financial Group Limited is a New Zealand Registered Company, established in In 2014 gained its Financial Services Provider Licence from the FMA (refer to for more information). We provide various Financial Services including financial education, to assist people learn and understand about potential financial strategies before embarking on them. We do not currently sell any Financial Products. Debt repayments are one of the largest expenses people have, yet we aren’t taught about how to repay debt efficiently & effectively.

DEBT MANAGEMENT - INTRO Debt Management is both; a) Understanding the risks and opportunities that using debt has on your financial situation, &, b) Identifying ways to reduce or eliminate this debt as quickly and efficiently as possible. The total amount of interest you pay (after tax) is the best metric to use when comparing strategies (not interest rates).

DEBT MANAGEMENT - GOOD OR BAD BAD DEBTGOOD DEBT Used to Buy Good & Services or Assets that fall in value (or have no value) once purchased, or an asset that does not produce an income Used to buy Assets which have the potential to grow in value & generate Assessable income Interest on this form of Debt is not tax deductibleInterest on this form of Debt is usually tax deductible We generally want to repay this kind of debt first.Income from the asset can be used to repay debt making it easier to service Personal Loan on a Car. Credit Card purchases for living costs not repaid in interest free period. A loan to purchase an income producing Asset (property / shares etc). Is a mortgage on your own home a Good or Bad Debt?

4 STRATEGIES TO REDUCE DEBT FASTER STRATEGY SUMMARY  Reduce Interest Rates &/or fees  increase Frequency of Repayments  Offset the Loan  Debt Recycling

STRATEGY 1 - REDUCE INTEREST &/OR FEES Look to reduce the interest rate &/or associated fees on the loan, via Strategy OptionDescription Consolidate Bad Debts If you have more than 1 bad debt, you may want to consolidate them into your mortgage which will usually have a lower interest rate. Loan Refinancing You may want to refinance your loans to take advantage of lower interest rates or fees. Loan Splitting/Structuring You may want to take out more than 1 loan to take advantage of different interest rates or repayment structures.

CONSOLIDATE INEFFICIENT DEBT HOW DOES THE STRATEGY WORK? With this strategy you will;  Increase the mortgage on your family home, &,  Use the extra funds to pay off other inefficient debts which have a higher interest rate such as a personal loan or credit card. By using the lower interest rate on your mortgage you can: 1) Reduce the applicable interest rate on your loans, 2) Thus save interest, and, 3) Pay off your debts sooner. Before Consolidation - Based on the repayments indicated, all loans can be repaid in 16yrs 8mths with interest paid of approx. $222,140. After Consolidation - Assuming the same repayment of $2,698.34, all loans can be repaid in 16yrs 3mths with interest paid of approx. $215,020 Circ $7,000 Interest Saved

LOAN REFINANCING HOW DOES THE STRATEGY WORK? With this strategy you will;  Refinance your single loan to a lower interest rate.  Use the extra funds from the reduced interest payable to pay off the debt faster. Before Refinancing - Based on the repayments indicated, the loan can be repaid in 20yrs with interest paid of approx. $258,220. After Refinancing - Assuming the same repayment of $2,325.29, the loan can be repaid in 17yrs 4mths with interest paid of approx. $182,850. Circ $78,000 Interest Saved

LOAN SPLITTING / STRUCTURING HOW DOES THE STRATEGY WORK? With this strategy you will;  Refinance your single loan into 2 or more loans to take advantage of lower interest rates.  Use the extra funds from the reduced interest payable to pay off the debt faster. Loan splitting provides an outcome similar to Loan Refinancing. It is particularly useful when you want to fix part of your loan for a period when combined with and Offset or Redraw strategy (where these have a higher interest rate but useful features). In this example we can repay our loan in 18.5 years paying $214,820 rather than 20 year nd paying 258,215 interest. Circ $43,000 Interest Saved

STRATEGY 2 – INCREASE PAYMENT FREQUENCY HOW DOES THE STRATEGY WORK? With this strategy you will; Make repayments more frequently than required (even if the total repayment amount stays the same). By doing so you will be offsetting interest earlier. This generates an interest savings whilst initially small over a longer time frame can add up to a significant amount. Yearly Repayment - Based on the repayments indicated, the loan can be repaid in 20yrs with interest paid of approx. $266,360. Weekly Repayment – Based on the new lower repayment, the loan remains paid over 20yrs with interest paid of approx. $257,650. However if we apply the Extra Repayments to the loan, it can be repaid in 19yrs 4mths with interest paid of $247,790. There is a smaller benefit when moving from Monthly to Weekly. Key Principle - Make repayments as early as possible, to offset interest as long as you can.

STRATEGY 3 – OFFSET THE LOAN Some loans allow us to park funds temporarily which we can then access as needed. Interest on most home loans is calculated on the daily balance even though it is applied monthly. Therefore reducing the average daily loan balance (even for short periods of time), can reduce the interest payable and term of your loan without making extra repayments. Strategy OptionDescription Use Cash Reserves to Offset the Loan If you have an Emergency Fund or other cash holdings in a cash account, you may use this money to offset or reduce your mortgage. Direct Excess Cashflow If you spend less than you earn, you may want to use your surplus cashflow to accelerate the repayment of your home loan. Sell Underutilised Assets This is a final & most extreme option. However if you have “stuff” which you never use & can’t see yourself doing so, try and sell it and use the proceeds to reduce your debt.

USE CASH RESERVES TO OFFSET THE LOAN HOW DOES THE STRATEGY WORK? With this strategy you will either; Offset the loan amount with amounts in a Cash Acct to reduce interest payable or, Place funds from the Cash Acct onto the loan (with ability to redraw) to reduce interest payable. By doing so you will be earning a higher after tax return than a Cash Acct & by offsetting interest reduce your loan term. Before Offsetting - Based on the repayments indicated, the loan can be repaid in 20yrs with interest paid of approx. $258,220. After Offsetting – By Offsetting $10,000 from day 1 of the loan and maintaining the same repayment, we can repay the loan over 18yrs 8mths with interest paid of approx. $229,640. Circ $28,000 Interest Saved

DIRECT EXCESS CASHFLOW HOW DOES THE STRATEGY WORK? With this strategy you will either; Use excess cashflow to Offset the loan & reduce interest payable, or, Place excess cashflow onto the loan (with ability to redraw) to reduce interest payable. Either way your salary immediately reduces the size of the loan on which interest is calculated. As mortgage interest rates are higher than cash accounts you effectively achieve a higher return. You can access your money to meet living expenses during the month, or use a credit card with an interest free period to fund living expenses (as long as it is cleared before interest is charged). In the example $15,000 is paid into the offset every 3 months, $5,000 of this is taken out in the first month, and each month. Thus no extra repayment to the loan is made. In this case the Total Interest paid reduces from approx. 258,220 to $243,160 and the term from 20yrs to 19yrs 4mths. Circ $15,000 Interest Saved

STRATEGY 4 – DEBT RECYCLING HOW DOES THE STRATEGY WORK? You will; 1) Use equity in your home to establish an investment loan. 2) Invest this borrowed money, & 3) Use the investment income & tax advantages from this investment to reduce your inefficient home loan balance. 4) As this balance falls increase you investment loan & add to your investment portfolio, until the inefficient home loan is repaid. Why does this work. As mentioned earlier there are no tax benefits associated with inefficient debt. The interest cost is borne as an Expense taken from Net Income. Debt Recycling progressively moves this burden to a Deduction (i.e. Before Tax expense). This reduces the after-tax cost of the interest (in the example from 7% to 4.7% if on the 33% marginal tax rate). Interest Saved depends upon situation

WRAP UP In this presentation we have outlined some general concepts about debt, and gone through 4 general strategies proven to be highly effective in helping people repay debt faster (without necessarily increasing repayment). Individually each strategy could improve your financial position. By using a number of them in combination you could significantly reduce the time to repay debt & achieve your financial objectives sooner. To find out more about any of the strategies outlined, or to arrange a Consultation on what strategies may best suit your situation (fees may apply) contact us at