You are most likely well aware that your debt position can have an enormous impact on your financial and general well-being. However, you may not be aware of the different types of debt and their implications for your financial future.

The good

‘Good debt’ is the ability to leverage debt for the purpose of growing your wealth where assets acquired may increase in value and/or generate an income. Often, interest payable on this type of debt is tax deductible. Examples of this type of debt may include money borrowed to purchase shares, managed funds or investment properties.

The bad

‘Bad debt’ usually refers to debt which attracts higher interest rates such as credit cards, student loans, personal loans and, in some cases, mortgages. This type of debt is less likely to generate an income, appreciate in value or have the ability to offset interest payable as a tax deduction.

The ugly

The ugly side of debt is highlighted in some frightening financial realities, including:

Australians owe over $32 billion in credit card debt (an average of $4,200 per card holder) [1];
Australian household debt has grown by more than 10% each year over the last 20 years and is over $2 trillion, [2] - the third highest household debt in the world [3];
Mortgage stress is increasing in Australia. It is estimated that more than 860,000 households are suffering from mortgage stress and it is predicted that more than 45,000 households risk default in the next 12 months [4];
It is estimated that 20% of home loan defaults are due to the accident or illness of a person in the household [5]. The top three causes of mortgage default include divorce or separation, illness or involuntary unemployment, or a death in the family. [6]

While debt is a reality for most of us, if you don’t have adequate savings or contingency plans in place, a change of circumstances, such as a rise in interest rates or loss of your income due to an illness, could result in dire financial consequences.

Managing debt: 3 steps to get ahead

If you want more of the ‘good’, less of the ‘bad’ and none of the ‘ugly,’ it’s time to put a debt management plan in place. Our three tips can help you get ahead.

#1: Use your debt to get ahead

In addition to paying down your personal debt, designating debt for the purpose of generating an income may be an appropriate strategy to help you get ahead. Using debt to purchase assets (including shares, managed funds or an investment property) which will appreciate in value and return an income can be a successful financial strategy. In your retirement years, we can also consider strategies such as reverse mortgage debt which may assist in funding aged care.

By collaborating with other aligned professionals such as your accountant, we may also be able to identify tax efficiencies or address more tax effective ways of structuring debt aligned to your personal circumstances and overall financial goals.

#2: Take small steps to make a big difference

There may be a number of simple steps you can implement which will make a big difference to your overall debt position. Examples may include refinancing your home loan to benefit from lower interest rates or preferable loan conditions, or increasing the frequency of your home loan repayments. If your lender allows it, changing your mortgage repayments from monthly to fortnightly can help you pay off your home loan years earlier with less interest payable on the loan.

Identifying strategies to plan for the unexpected through personal insurances is also an important step in protecting your lifestyle, both now and in the future.

#3: Prioritise your debts

By better understanding your debt, we can assist you in prioritising your debts. This may include strategies such as paying off debts with the highest interest rates first, consolidating debts into your home loan or using offset accounts to save on interest.

If you would like advice on managing your debt, or using debt to get ahead, I invite you to contact our office on 07 3720 1299 or email admin@wealthfundamentals.com.au

Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.

The information (including taxation) contained within this document does not consider your personal circumstances and is of a general nature only - unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based upon our understanding of legislation at the time of writing. Such legislation may be subject to change.

This publication cannot be reproduced in any form without the express written consent of the author.

[1] https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock
[2] http://business.curtin.edu.au/wp-content/uploads/sites/5/2015/10/bcec-beyond-our-means-report.pdf
[3] http://www.businessinsider.com/these-are-the-countries-with-the-biggest-debt-slaves-2017-1?IR=T
[4] http://www.digitalfinanceanalytics.com/blog/mortgage-stress-still-on-the-up/
[5]https://www.ahuri.edu.au/__data/assets/pdf_file/0010/2233/AHURI_Final_Report_No145_Mortgage-default-in-Australia-nature,-causes-and-social-and-economic-Impacts.pdf
[6] https://www.canstar.com.au/home-loans/biggest-causes-of-mortgage-default/