The rewards and traps of clearing your debts
Graham Moore didn’t sell his house in Auckland with the deliberate intention of cashing up for a debt-free life, but that has been a welcome consequence of the decision.
Moore moved to Havelock North eight years ago to be nearer his elderly parents.
The sale of his Orakei property gave him enough money to buy a nice home in Hawke’s Bay, without a mortgage.
‘‘I’m lucky enough now, at 55, to only work part-time self-employed at home. I don’t have to work fulltime because I don’t need the income anymore.’’
He had worked at ASB for 20 years in accounting roles and went to university part-time so that he did not have any student debt. ‘‘Now people are walking away fully qualified with a $100,000 debt.’’
Not having any loans to worry about meant a much more relaxed approach to life, he said.
‘‘I suppose you could say I’m asset rich not income rich. I don’t go spending a lot of money, I might go on holiday once a year. I live a conservative lifestyle but at least I know that if I want to do something, if someone says ‘let’s go to Aussie for a week’, I can afford to do that.’’
Moore said he had a credit card but made sure it was paid off in full at the end of each month.
He had also had investments in shares throughout his life and was in KiwiSaver from the beginning.
‘‘Everyone has different lifestyles and different goals but if you want to be in a position to pay for your family and eventual retirement you need to concentrate on repaying debt.
‘‘I have a friend who’s 62 who wants to retire but he owes $400,000, what’s he going to do? He can’t quit his job.’’
Wellington retiree Warren Lewthwaite said he, too, was enjoying the freedom of being debtfree. ‘‘I’ve got a million-dollar property I’m sitting on.’’
He was now working only when he wanted to, charging nothing to help friends with work needed on their homes.
For a while, he might have wondered whether he would ever achieve the goal. Lewthwaite said there was a time in his 20s when he was ‘‘technically banlrupt’’.
Working in the building trade, work was becoming more occasional, his family circumstances ‘‘weren’t easy’’ and more was being spent than was earnt.
He went to apply for a benefit but was turned away because he had no shoes. ‘‘I said ‘bugger you I’ll go and get a job’.’’
From there, he built his finances back up again.
He developed some rules to live by, such as not borrowing money to buy a depreciating asset.
Early in his life he took out a post office loan for a deposit on a car and borrowed the rest of the money. Lewthwaite remembers being shocked at paying back four times the initial purchase price, only to discover the car’s value had dropped to half what he’d paid.
The other principles were to pay down his mortgages as fast as possible and, where possible, buy houses that could be done up.
He bought three rental properties for $40,000 each in cheaper parts of Dunedin, added insulation, heat pumps, reroofed and painted them.
‘‘I sat on them. Early on I read something that in terms of property investment you don’t try to secondguess the market. Buy and hold for a long time because over the longterm property goes up in value, although in the short-term it can go down … I didn’t buy expensive properties that were highly geared. I had friends who did and I saw them come unstuck.’’
He sold the homes as he got closer to retirement age, for about $100,000 each with no debt owing on them.
Lewthwaite said he had never had much of a budget but had always tried to live within his means.
If he wanted a holiday, he would save to pay for it rather than putting it on a credit card.
‘‘I don’t think I’ve had a boring life. I remember talking to someone about it one day and saying it’s easy to save money, you just spend less than what you earn and they said ‘and have no life’. I can see what they mean, you can’t go out with your friends all the time or stay out drinking til 4am with everyone else or get around in a flash car.’’
Tom Hartmann, managing editor of Sorted, said paying off all debt was a realistic goal for most people, although it could feel ‘‘incredibly daunting’’.
‘‘You see incredible stories of people paying down tens of thousands of dollars of debt and getting on the road to home ownership.’’
He said people would often underestimate how much they could achieve over long periods of time but overestimate what they could do in the short term.
That might mean they would sign up to bigger repayments than were comfortable for a short-term loan but not consider how much of a mortgage they would pay off over a decade.
He said consolidating debt could help people get rid of it but it was important to do so carefully.
‘‘If the person doesn’t change their underlying behaviour the debt consolidation is typically not going to work … it frees up other ways of borrowing, your credit card is suddenly empty or your personal loan, you have the ability to borrow there again. So even though you consolidate debt you end up further into it because you keep borrowing.’’
He said debt was often not due to inadequate income but about how it was being managed.