A big bad word but here I go over a few concepts to do with debt and how you can use it to your advantage. I want to make it clear that I would not recommend taking out debt for anything that carries sizeable risk because if something goes wrong, it can spiral out of control.
Consumer Debt
Consumer debt is any form of debt where a loan for cash or cash equivalent is taken out and generally carries very high interest rates on the loan. For this reason, I would recommend avoiding it unless it has low/no interest but if taking this route, you must be extremely careful and thoroughly read the terms and conditions to ensure that you do indeed end up only paying a low/no interest on the entire amount of the loan.
Credit Card Debt
Credit cards can be an extremely useful tool and should be utilised to its fullest extent by everyone, however if you’re not careful, you can end up with credit debt which is one of the worst forms of debt due to its extortionately high interest. Always pay back your credit card statement IN FULL EVERY MONTH and don’t make any purchases that you won’t be able to pay off in full. You should never have a credit card bill that’s more than what can immediately pay off.
What to do if you have Consumer Debt
Obviously being in a state where you have consumer debt and are paying high interest on it is best avoided but if you’re already in the situation, r/ausfinance has a great page on it and here is my take on it:
- Get an overview of all of your debts and order them by interest rate.
- Consider having a look at consolidating your loan(s) to a single new one with a lower interest rate. This may not be possible if you have a bad credit history.
- While keeping enough for your emergency fund (you don’t want to have to take out another loan because of an emergency) and regular expenses, pay off your highest interest rate loan as much as you can while ensuring that the minimum payment is made on all other loans (avalanche method). This is where it’s easier if you consolidate or only have one loan as then you can just put all you can into the one loan without worrying about any other.
- Keep repeating step 3 until your loans are completely paid off.
- Once you no longer have debt, put all of what you would have put into paying off the loan, into your savings or investments rather than spending it immediately. You don’t want to remove your negative balance just to hold a 0 balance forever, you want it to be positive.
Student Debt (HECS)
With federal government policy as it is right now, never voluntarily repay any of your HECS. There is ALWAYS a better option with what you can do with your money than repaying HECS.
If however you have student loans that are not part of a HECS debt and actually accrue substantial interest then you should look to pay it off as if it were any other kind of consumer debt.
Home Loans (Mortgage)
If you are fortunate enough to have a property and a home loan, then congratulations, you own an asset that will continue to be artificially inflated beyond reason, pricing an entire generation (and everyone else with little wealth) out of a basic human necessity as long as the LNP stays in power.
Beyond that, you should always be looking for the best home loan packages out there and as long as your credit history permits, keep refinance to better plans. You will be wasting a significant amount of money over the lifetime of a long-term home loan if you just stick with your original one. Here are some things to look out for:
- Offset accounts are great if you have a significant amount of cash
- Smaller banks (including Neobanks) typically offer better rates but may be more difficult to deal with (i.e. they might not have many (or any) physical branches, they hire offshore staff for support)
- Many banks offer instant cashback as a sign-up bonus (generally a few $1000) if you refinance with them. A good strategy may be to just regularly switch between the banks who offer these incentives. You owe no loyalty whatsoever to any bank.