Credit seems to be everywhere.
Visit the local shopping centre and we will be enticed by interest-free terms on a new lounge, bed, TV, or white goods. More and more shops are offering access to ‘Afterpay’, and of course, credit cards are accepted everywhere.
On top of that, motor vehicle dealerships are offering very favourable finance allowing us to hop into the latest car, SUV, or more likely – the dual cab ute costing $50,000 or more.
But is this a good, or a bad thing?
Australians have amongst the highest personal debt in the world. Around $2 trillion spread over mortgages for owner-occupied dwellings (56.3%), investment debt, including property (36.5%), consumer credit, car loans and the like (3.1%), student loans (2.1%), and credit cards (1.9%).
Let’s put some perspective around the numbers.
According to the ABC (July 2018), Australians have $45 billion in credit card debt.
A $2,000 credit card debt will take 17 years to repay if only making the minimum monthly payments!
One in six Australians is struggling to dig their way out of the debt trap. As at June 2017, ASIC found that almost 550,000 Australian credit card holders are in arrears, an additional 930,000 have persistent debt, and 435,000 are repaying only small amounts.
Have we got something wrong in the mix?
If we are interested in casting off the shackles of debt for once and for all, there is a way. It will require discipline, and, for a time, life will be tough. It will mean going without.
But in the end, there will be a sense of relief and freedom as the debts are cleared and money can be saved for more exciting pursuits, or for accelerating home mortgage payments.
The internet offers lots of good information for getting out of debt and living a debt-free life. YouTube has heaps of coverage on the topic. Debt-free living is a new subculture.
In the meantime, let me share some steps for getting out of debt:
- If you are a couple, you both need to commit.
- Cut up all the credit cards.
- Agree to only buy things using cash or a debit card.
- List all your debts, including the outstanding balance and minimum monthly payments. Don’t forget debts to family members.
- Put in place a strict budget with only minimal discretionary spending.
- Make minimum payments on each debt and apply all additional income to one debt – start with the one with the lowest balance.
- Once one debt is cleared, start on the next one – and so on until all debts are repaid.
If you do not have great money management capabilities, ensure you only use cash or a debit card. This will ensure you don’t overspend or accumulate debt on a credit card.
There are many variations to the theme, however, the starting point is admitting there is a problem that needs to be addressed and agreeing to take serious steps to get out and stay out of debt.
If you need help, seek advice from a financial planner or call the National Debt Helpline on 1800 007 007.
By Peter Kelly – Superannuation, SMSF and Retirement Planning Specialist, Centrepoint Alliance
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Disclaimer: The articles in this newsletter are of a general nature only and are not to be taken as recommendations as they might be unsuited to your specific circumstances. The contents herein do not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions.
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