Tips for tackling debt

In our era of easy credit, what’s the difference between good and bad debt?

Australians have the highest household debt to disposable income ratio in the world – so how can you manage your own debts?

Financial experts agree that the first step is to differentiate between good and bad debt. Good debt is tax-deductible, and based around wealth-building assets, such as an investment property mortgage. Bad debt is non-deductible, and used to purchase depreciating assets, such as car loans and items on credit cards.

Spending the rest of your life just paying off your debts isn’t anyone’s idea of a good strategy. As you get closer to retirement, ask yourself: will this asset show a capital gain, and is my debt tax deductible? If you’re losing money, and there’s a gap between the loan interest and your income then it may not be worth it.

Make debt work for you
Taming debt can seem hard to accomplish, particularly when it seems to take on a life of its own. But it’s often small changes which can really work magic.

1. Focus on the long term
   What’s the real cost of an item purchased through debt once interest repayments are factored in?
2. What are your money beliefs?
   We often have beliefs about money based on our parent’s financial behaviour. Unless we try to modify our habits, they form our ‘money personality’, which may explain a disposition to a spending, saving or investing mentality.
3. Develop a repayment plan and stick to it
   Which debts charge the most interest, and which are the priorities? Generally, credit and store cards carry the highest rates, followed by personal and car loans.
4. Try to repay more than the minimum repayments
   Lenders have designed debt products to make money, so simply making minimum repayments isn’t enough.
5. Don’t be fooled by points schemes
   Many credit cards offer the promise of reward points, but as a result charge higher annual fees. Would you be better off saving the money and purchasing the item outright?
6. Get in the habit of saving
   In an era of easy credit, the concept of saving is a new idea for many. A debit card is a good alternative if you can’t delay gratification.

— article orginally appeared in Colonial First State’s e-iQ Magazine

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate in light of your particular needs and circumstances.