Debt Recycling Series Chapter 8: Mistakes to Avoid
Learn from my 8 biggest lessons—so you don’t have to learn the hard way.
Debt recycling helped me grow my net worth by $450K in just 18 months. But here’s the thing—it only works if you do it right.
This strategy can be incredibly powerful, but it’s also easy to mess up if you don’t know what you’re doing. Borrowing to invest adds complexity, risk, and tax rules into the mix. If you’re not careful, it can cost you thousands—or set you back years.
The good news? These mistakes are avoidable.
Here are the biggest pitfalls I’ve seen (and dodged) on my own debt recycling journey—plus the lessons that helped me stay on track.
⚠️ Disclaimer ⚠️
This content is for educational purposes only and does not constitute financial advice. The examples provided are hypothetical and based on assumptions. Your financial situation and results may differ. Debt recycling involves risks, including market volatility and changes in interest rates. This content does not recommend or promote any specific financial product or service. Always consult with a licensed financial advisor, tax professional, or mortgage broker to ensure this strategy aligns with your personal circumstances.
Mistake #1: Borrowing Too Much Without a Safety Net
What Happens:
Life happens—job loss, illness, market crashes, rising rates. If you don’t have a buffer, you might be forced to sell your investments at the worst possible time—when they’re down.
Imagine having to sell your ETF holdings at a loss just to make your next mortgage repayment. Not ideal.
How I Avoided It:
Kept a cash buffer of at least 6 months of living expenses (non-negotiable).
Didn’t rely on investment income alone to make the repayments—my salary covered my mortgage repayments, and I ensured I still had enough left for living expenses, investing, savings, and fun money.
Reinvested dividends—never saw them as part of my budget.
Stress-tested repayments by assuming a 2–3% interest rate rise before borrowing and making sure I could still make repayments.
Got income protection insurance in case I couldn’t work due to illness or injury for an extended time. I also had enough emergency funds to cover the waiting period.
Lesson:
Debt recycling only works if you can handle setbacks. Plan for the worst, aim for the best.
Mistake #2: Investing in the Wrong Assets
What Happens:
Borrowing to invest in risky or speculative assets is basically gambling with debt. If your investment tanks, you're stuck with the debt—but without the returns.
Think crypto, penny stocks, or "get-rich-quick" schemes. This is how people end up worse off than when they started.
How I Avoided It:
Stuck to boring but proven assets like ETFs and dividend-paying stocks.
Avoided anything I wouldn’t invest my own cash savings in.
Focused on long-term growth and stability, not hot tips or fast wins.
Consulted with a tax accountant to ensure it met ATO requirements to qualify for tax deductions.
Takeaway:
If you wouldn’t invest your savings in it, don’t use debt for it either.
Mistake #3: Doing It Just for Tax Savings
What Happens:
Debt recycling is not a tax hack. Yes, tax deductions are nice—but they’re not a reason to take on debt.
If your investments underperform, you still lose money—even if you save on tax. And over-leveraging (borrowing too much) just to reduce your tax bill can backfire badly.
How I Avoided It:
Focused on building long-term wealth, not just cutting tax.
Chose investments that were aligned with my values and goals.
Made sure the strategy still worked without tax perks. Could I still build wealth without tax deductions? Absolutely. Tax rules can change at any time—so don’t rely on them.
Takeaway:
Tax savings are the cherry on top, not the cake. Debt recycling only works if your investments grow and your cashflow is sustainable.
Mistake #4: Ignoring Cash Flow & Tax Timing
What Happens:
Tax refunds only come once a year.
Dividends are not guaranteed.
Poor timing (like selling shares in June) can cost thousands in missed deductions. In Australia, the Financial Year (FY) is defined from 1 July to 30 June the following year.
My Example:
In June 2023, I needed to sell my shares to free up $405k for debt recycling (details in Chapter 7). If I’d sold in June:
I’d pay capital gains tax immediately for FY22/23.
I wouldn’t have any loan interest deductions to offset it, since the loan wasn’t drawn until the end of June. I would’ve only had one month of loan interest to offset tens of thousands in capital gains. I'd end up paying 45% tax on the gains.
So I waited and sold the shares in July 2023 instead because:
I'd have a full financial year of tax deductions for FY23/24, which ended up being over $21k in loan interest.
I could offset capital gains and dividend income with the loan interest and got a tax refund instead of a bill.
How I Avoided It:
Planned the sale around tax time to maximise deductions.
Treated tax refunds as a bonus, not a necessity.
Ensured my salary alone covered repayments—so I wasn’t relying on any refunds.
Mistake #5: Thinking Debt Recycling Is for Everyone
What Happens:
Debt recycling sounds great on paper. But it’s not for everyone.
If your income is unstable or you’re not comfortable with risk, this strategy can cause more stress than benefit.
Just because it looks good on a spreadsheet doesn’t mean it’s the right fit. It’s not just a numbers game.
Taking on debt changes your lifestyle. Without a safety net, you could be building a financial trap instead of financial freedom.
How I Avoided It:
Made sure my income was stable and I could afford repayments—even if interest rates rose 2–3%.
Built a strong financial cushion (emergency savings, etc).
Only recycled an amount I was 100% comfortable managing and happy to leave invested long-term. I didn’t need that money for anything short-term like buying a car or travelling.
Takeaway:
The right strategy at the wrong time is still the wrong strategy. Don’t get influenced by social media (even mine!). Educate yourself and get professional advice so the strategy fits your goals, lifestyle, risk appetite and most importantly, your mental health.
Mistake #6: Mixing Investment and Personal Loan
What Happens:
You debt recycled a portion of your home loan by paying it down and redrawing the same amount—but it’s all happening in one loan account.
This makes it hard to track what portion of the interest is deductible, and what isn’t.
The ATO can reject your claim if they can’t clearly trace how the money was used.
How I Avoided It:
Split my home loan into separate sub-loans.
Debt recycled the entire amount of one split, keeping it clean for tax records (more on this in previous Chapter 7).
Takeaway:
Keep personal and investment loans completely separate. It’ll save you headaches—and keep you compliant with the ATO.
Mistake #7: Accidentally Closing the Loan Account
What Happens:
Some lenders will automatically close your loan account if it’s fully paid off. If that happens, you lose the ability to redraw funds—and might have to reapply for a new loan.
How I Avoided It:
I did this step in two stages:
Paid $404,999—leaving $1 unpaid. Some banks close the account immediately once a loan is fully repaid, so I left $1 to keep it open.
Redrew $404,999, bringing the balance back to $405,000. That $1 still needed to be recycled.
Paid the remaining $1 and redrew it—now I’ve debt recycled the full $405,000.
Takeaway:
That $1 trick saved me from delays and paperwork. A tiny move, but it made a big difference.
Mistake #8: Skipping Professional Advice
What Happens:
I know DIY is tempting—but debt recycling involves:
Structuring loans correctly
Keeping clear tax records
Picking suitable investments
Understanding ATO rules
Mess any of this up, and you risk losing deductions—or worse.
How I Avoided It:
Financial Advisor helped build a personalised strategy.
Tax Accountant ensured deductions were claimed correctly.
Mortgage Broker structured the loans for maximum flexibility and tax effectiveness.
Takeaway:
I paid $6,600 for expert advice—and it helped me grow my net worth by $450,000 in 18 months. That’s just 1.47% of my gain.
Worth. Every. Cent.
Final Thoughts
Debt recycling can be incredibly effective, but it’s not something you want to do casually. Mistakes can be costly—not just financially, but emotionally too.
Taking the time to understand how it works, learning from others, and seeking expert help made a massive difference for me.
This journey has taught me that wealth-building isn’t just about being smart—it’s about being prepared, intentional, and cautious when needed.
So, What’s Next?
In the next chapter, I’ll be answering your questions about debt recycling—including specific scenarios that many people have asked me about since I started sharing this journey.
Have a question? Drop it in the comments or reply to this post—I might include it in the final BONUS Chapter!
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Thanks for reading and being here 🧡
With love,
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⚠️ Disclaimer ⚠️
This content is for educational purposes only and does not constitute financial advice. The examples provided are hypothetical and based on assumptions. Your financial situation and results may differ. Debt recycling involves risks, including market volatility and changes in interest rates. This content does not recommend or promote any specific financial product or service. Always consult with a licensed financial advisor, tax professional, or mortgage broker to ensure this strategy aligns with your personal circumstances.