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Most people have debt. In fact, in the last 30 years, the ratio of household debt to disposable income has almost tripled from 64% to 185%1. The good news for Australians is that the vast majority of our debt is considered ‘good debt’; that is debt used to build wealth in the long term (i.e. for a house or investment). Although most of our debt may be ‘good’, it still may cause us to lose sleep at night.
At some point, debt can scare us all. Even those with a clear plan and strong execution may still be freaked out by debt at some stage!
So how do you know how you are travelling with your debt? Do you need help with managing your debt or have you got it all under control?
An adviser can help to understand your debt. Get in touch and become a debt Rockstar.
Debt Basics
There are some basic fundamentals that everyone who owes money should be across.
Would your name be in a star on the Debt walk of fame?
Only bite what you can chew:
When taking on debt ensure your income can cope with the repayments, as well as all other expenses you may have. If you are borrowing for consumption purposes (ie. Travel, shopping or basics) ensure you have a clear plan for paying it off efficiently. If it is wealth building debt focus on the interest. Consider interest rate changes as well – what would happen if rates went up or down?
Make your payments:
The timing of your payments is important to monitor. Being caught short can cost you in extra interest or bad credit.
Chose the right debt product:
Many of us hold reward credit cards, but the reality is that for most they don’t make financial sense. Check the value of any rewards cards vs the fee’s – don’t forget to add in interest payments if you have forgotten a payment – that is the actual cost of holding those cards.
If you are needing to borrow a car or personal expense, shop around; there are many options.
When it comes to home loans, finding the right product can save you tens of thousands of dollars of the life of your loan.
Debt Mastery
There are few key signs you are indeed a debt superstar! That’s in managing your debt, not accumulating it…
You pay everything on time
You have a streamlined banking system
You have any surplus or day to day funds set aside your mortgage in an offset account
You are leveraging the equity in your home or investment property assets to borrow more for investment purposes.
So what is your debt skill?
Work your way through the following to see where you stand with dealing with debt:
My debt situation
Never
Sometimes
Always
I am on top of all my bills and know what I will have to pay each month
Never
Sometimes
Always
I pay my credit cards in full each month (not just the minimum amount due)
Never
Sometimes
Always
I pay my bills on time
Never
Sometimes
Always
I am able to pay my bills in full each month
Never
Sometimes
Always
I am able to pay for everyday items (i.e. groceries) without having to borrow money
Never
Sometimes
Always
I have never been turned down for a loan because of bad credit
Never
Sometimes
Always
My savings are only used for the purpose they are intended (I don’t need to dip into them to pay monthly bills)
Never
Sometimes
Always
I am able to afford to seek medical help or treatment when I need it
Never
Sometimes
Always
For those with a mortgage
I review my mortgage package at least every two years to ensure I am getting the best deal
Never
Sometimes
Always
My income and net savings are kept in an account that offsets my mortgage
Never
Sometimes
Always
I utilise the equity in my home to further my investments
Never
Sometimes
Always
How did you do?
The more times you answer ‘never’ the likelihood you have too much debt. If you have answered with all ‘always’ you are a Debt Rockstar. Well done, keep up the great work, but don’t become complacent.
As financial advisers, it is our job to work with people to help them better understand their current situation and the options available to them. We always start with getting to know you first and helping you to clarify what is most important to you.
Nearly all of us have a gap between our values, or the things that matter most to us, and our behaviour, what we actually do. There are many reasons for this, and they are quite valid! Working with an adviser is like having a fitness coach, we are here to help you stay on track.
Do you have a mortgage? Learn how you can use debt recycling to really make the most of your debt.
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
