Make debt a thing of the past

Each stage of our lives brings different financial pressures. But if you take control of your spending and you’re clear about your goals, you can make your money work for you and build a secure future.

It might seem counter-intuitive, but if you’re wealthy and paying off your home you’re likely to be in serious debt. The latest stats from the Australian Bureau of Statistics (ABS) show 29% of households are overindebted. Worryingly, almost half of us with a mortgage (47%) are struggling under the weight of repayments and a quarter of high-income households have too much debt. Sydney and Melbourne have the highest debt stress.

If this sounds all too familiar, there are plenty of ways to get those debts under control for good. The strategies that will work will depend on your age and where you’re at in life. In most cases, the idea is to knuckle down and plan to pay debt off as soon as you can. You may have to make some sacrifices along the way, but every dollar you pay is a dollar that goes toward funding your future financial independence.

It can be tough understanding how to navigate your finances when you’re in your first job or buying your first car or home, especially if you weren’t taught personal finance fundamentals at home or at school.

Gianna Thomson, a principal financial planner at Thomson Wealth, says at this stage of life it can be a good idea to stay away from credit cards and buy now, pay later services such as Afterpay and Zip Pay.

“If you do need a credit card, have a small limit of no more than $2000. Always try to keep a cash buffer to use instead of paying for things with a credit card. I don’t have a credit card and use my Visa debit card for internet purchases,” says Thomson.

Donna Sgangarella, managing director at FinFit Wealth Solutions, says although your 20s should be a time to set goals and spend smartly, all too often people in this age bracket have big personal debt. It’s usually a mixture of credit cards, personal loans, car loans and buy now, pay later services.

“At this time you should be developing solid financial habits to set you up for life. This is because people without personal debts in their 20s end up in a much better financial position in their 30s and beyond. The only debt you should have is HECS-HELP after investing in your education and earning potential. It’s one of the cheapest loans you can get for the greatest future return,” says Sgangarella.

If you do have a large personal debt when you’re young, focus on clearing it because interest rates on personal loans and credit cards are extremely high. The quicker you get rid of it, the less of an issue it’s going to be later in life.

Pekada financial adviser Zac Masters says it’s important younger people ensure they never borrow beyond their means and have a plan B in place if something goes wrong, such as job loss or an inability to work due to illness or injury. “These risks may be funded by a cash buffer or insurance,” says Masters.

Also, when getting into a relationship in your 20s, it’s important to have a deep conversation about your financial goals with your partner and reach an agreement about

how you will work towards them. Ensure everything is fair and equitable, especially if one partner earns considerably more.

“It’s also important to discuss if anyone is bringing debt into the relationship and what their plans are for that in the future. Also talk through your attitudes towards merging your finances,” says Masters.

“This is where a ‘yours, mine, ours’ approach can work well. You might have an account for joint payments such as the mortgage, household expenses and investments and each have a separate account that can be used for discretionary spending. This avoids the risk of judging the other person for what they’re buying as they’re using their own money. This can go a long way towards reducing fights about money in the future.”

He also has tips for breaking an Afterpay addiction or debt cycle. The convenience of buy now, pay later services means more people are buying things they don’t need and can’t afford. The dopamine release people feel when they buy something means this cycle can slowly become an addiction that can get in the way of our ability to save.

“The majority of Afterpay users are millennials and the average transaction price is about $150. The real issue here is that if you can’t afford the $150 upfront, you already have cash flow problems. Wait a day or two whenever you are about to buy something because you might decide you don’t really need it,” says Masters.

If you feel as if you may be addicted to Afterpay you can apply a temporary freeze to your account. If your addiction is so bad that even a temporary freeze won’t work, the best thing may be to shut down your accounts once you’ve paid your remaining debts.

“Not having access will hopefully mean you only buy things you can afford. If you have closed your account, let someone you trust know what you’ve done and ask them to keep you accountable to make sure you don’t set up an account again,” says Masters.

Your 20s and 30s may also be the first time you get a home loan. Masters recommends having a good grasp of your expenses when applying for your first mortgage. “Understand what your repayments will be and how they fit in with your current expenses and lifestyle. You don’t want to get a loan you can’t afford to pay back and experience mortgage stress or to default on the loan,” he says.

It may be tempting to hit up your parents for part or all of your deposit, if they have the means to help out. But Sgangarella is cautious about young people tapping into the bank of mum and dad when the traditional bank won’t lend them enough to buy their home.

“You’re effectively asking your parents to pledge a deposit you should have saved. This isn’t a free loan – you still need to prove to the bank you can pay it back,” she says.

“There is also significant risk for your

parents as the bank takes a charge over their house. If you can’t pay back the loan, the bank could sell your place and your parents’ place to get back their money.

“This strategy becomes even riskier if the child is married. If the parents set up one of these arrangements and the child divorces, the oldies could say goodbye to your home.”

As a result, parents need to really trust their kids in these circumstances.

“Don’t do it unless you’re 100% confident you can keep up the repayments,” says Sgangarella.

“If you can’t pay back your parents’ loan, the bank could sell your place and theirs to get back the money”