Debt can be a wonderful slave but an unforgiving master and this article helps you understand how to control your debt before it controls you.
Australians have an extraordinarily high level of consumer debt, and we don’t like reducing it. For example, the number of credit card transactions in just the month of June 2014 was over 170,000,000 compared with only 24,484,000 repayments – that’s 145,500,000 more transactions than repayments (yes, that’s in millions)! Of course this means interest is accruing on unpaid credit cards literally by the second– at the time of writing it is almost $6,000,000,000 per annum (yes, that’s in billions)! You can see why banks LOVE credit cards!
Please don’t misunderstand; properly managed debt can be a great tool. Most people need it to help them purchase their first house and other necessities in life.
It is also very important in investment planning, enabling you to purchase income-producing growth assets, such as shares or property, to boost your long-term wealth. In this case the interest may also be a tax deduction.
The problem arises when debt is used for basic living costs or purchasing depreciating assets. This is further aggravated when the interest rate applied is too high and there is no planned debt reduction program in place. When interest rates increase most people focus on their mortgage rate and forget that the interest on their credit cards sneaks up too. Most major cards are charging around 18-20%pa with many customers paying little more than the minimum amount and sinking further into debt.
If you are not paying off your credit cards in full every month, have other high interest loans, or your current level of debt is keeping you awake at night, you need to seriously consider your financial direction. Follow this simple plan and take control of your debt before it takes control of you…
1. Restructure your debt by consolidating what you owe at the lowest available interest rate. Keep ONE credit card and cut up the rest!
2. Seek professional help from a financial adviser to plan your financial goals and how to achieve them.
3. Prepare and keep to a budget to ensure your cost of living is within your means and put a debt reduction program in place.
4. Beware of “interest free” offers and make sure you can afford to pay off the entire balance by the end of the contract. A lot can happen in 50 months so don’t get behind on your payments.
5. Ensure new loans are only for a productive purpose, such as investing, and can be justified by potential future profit.
6. Avoid the mental attitude of “keeping up with the Joneses” – the laugh will be on them when the debt collector turns up at their door!
All of the above steps will make for a much easier life in future years … not to mention sleeping better every night.
Note:
Current credit card figures from go www.rba.gov.au/statistics/tables go to Payments System and download the C1 Credit & Charge Card statistics spreadsheet.
Total interest figure from: https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock.
Sources:
www.rba.gov.au Credit and charge card statistics as at September 2013.
https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock
http://www.canstar.com.au/credit-cards/compare-everyday-spender/
Our financial advisors are available to help with any questions you may have as to how you can control your debt and better manage your finances.
Call (02) 4926 2300 or email us.
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