Dealing with debt and making debt work for you
Nowadays, debt has become part of everyday life. Tapping a credit card to pay for a coffee, buy a book or even pay for a holiday are common practice for many Australians. The vast majority of people buying property do so through a mortgage and banks also readily give out loans for non-essential purposes. With all of this “easy credit” available, how can you ensure that you make the best use of your debt and do not get in too deep?
Efficient debt and inefficient debt
Not all debt is created equal. A mortgage against a home is far better than credit card debt incurred to fund lifestyle expenditure. Whenever you have to go into debt make sure you have the best deal possible with the lowest possible rate of interest and the payment terms best suited to your situation to minimise the overall cost of holding the debt.
Managing existing debt
To best manage your existing debt, as a general rule, always try to minimise the amount of interest that you pay. Practical strategies to achieve this include:
- Minimise the use of your credit cards, do not let your debt spiral out of control.
- Aim to clear the balance of your credit card each month, paying the interest fee is money you could be using to build future wealth.
- If you have a large credit card debt, investigate options to do a balance transfer. This is when companies offer you a new credit card and charge 0% interest for a set term. When you get your new credit card, cut it up so that you do not accumulate more debt and set your repayments at a level that will clear the amount owing whilst no interest is being charged.
- For larger debts like a mortgage, always pay more than the minimum amount required, even it is just a little bit more. If you were to pay the minimum monthly requirements on a 30-year home loan, you will generally pay back double the amount that you borrowed.
A financial adviser can help you to reorganise your debts to minimise the inefficient debts and maximise the efficient ones and also, they can work with you to provide a structure to make repayments that you can afford.
Considering a mortgage or other large debt?
When considering a mortgage or other large debt, it is vital to fully understand the impact this will have on your finances.
Debt for purchases like a property can be inefficient if one does not take the time to ensure they are receiving the best deal available and if repayments are not structured in a way that optimises your financial situation. The two most important things to consider are:
- Can you afford this large debt?
- Have you factored in contingencies like changes in income, interest rates etc.?
If you are considering debt for personal use like a holiday, if you are really committed to wealth building and achieving financial freedom, it is recommended that you delay such purchases, set yourself a goal and have a plan to achieve it with money you save.
An experienced financial adviser will look at the options with you, help you create some projections of the impact of the repayments and also, assist in planning your spending.
Talking to a financial adviser
There is never a bad time to start talking to a financial adviser. You do not need to wait until you are over burdened with debt in order to speak to financial adviser, the sooner you start the conversation, the sooner you can enjoy the freedom that good financial health will bring.
Ready to talk to a financial adviser and say goodbye to bad debt? Get in touch with Talem Wealth and thrive financially.