GOT DEBT?

Does debt slow you down, or does it help you to live the life you want? Not all debt is “dumb”, but it should be helping you, not holding you back.

 

To help you figure out whether you’re handling your loans and credit cards properly, here are 10 simple rules for managing debt:

1. Know your worth.

What’s your net worth? You might have a home and sizable financial accounts. But what are you worth once you subtract all your debts? Stats NZ says the median net worth of NZ households was $529,000 the last time they checked (June 2024). This is one of the first things I ask new clients, and update at every review.

 

2. Use protection.

Are you taking the necessary steps to stop thieves from borrowing money using your identity? To protect yourself, carefully check your credit cards for errors and charges you don’t recognize, and report to your bank immediately if you spot something.

 

3. Keep score.

What’s your credit score? With so many websites and financial institutions offering free scores, you don’t have to pay anything these days to find out where you stand.

 

4. Clear the card.

Do you carry a credit card balance? What was purchased to accumulate that debt? Carrying high-interest credit card debt from month to month ranks as one of the most expensive financial mistakes. On top of that, if your balances are large relative to your cards’ credit limits, you are likely hurting your credit score.

 

5. Get rewarded.

Are you using a rewards credit card for all daily spending? Credit card debt is a type of dumb debt. But, if you can reliably clear the card without interest costs, a card rewards program might work. The best rewards return 1% cash back or the equivalent in other rewards, such as travel points. These rewards have always been funded from charges to vendors, so where the “surcharge” is a lot more than 1% it’s not really a “reward” any more.

 

6. Student loan to value ratio.

The average student loan is $30k at graduation. But typical graduate salaries can range from $55,000 to well over $100k. Are your children taking on a reasonable amount of student loans, given their likely career earnings? As a rule, students should try to limit their total student debt to a proportionate amount relative to their likely income.

 

7. Take an interest.

Should you make extra principal payments on your mortgage? It depends what you are comparing. Even if you have a home loan with a rock-bottom interest rate and even with a tax deduction from your investment property, the interest you save by paying down your mortgage might be greater than the interest you could earn by buying bonds and term deposits. But KiwiSaver aggressive growth funds have produced average pre-tax annual returns of 9.5% over the last 10 years. The key with this rule is to do a bit extra because both increase your net worth.

 

8. Stay in line.

Do you have a home equity line of credit? (In NZ this is known as a ‘revolving’ mortgage. If I did your mortgage, you probably have one.) The fees involved are typically modest and it could come in handy if you have a financial emergency. You might also use the credit line to pay off higher-cost debt, such as credit card debt, or to finance your next car purchase – just make sure you keep the regular payments the same or higher!

 

9. Be employable.

Is your job at risk? Some are predicting that technology or robots will replace many jobs.  That may be so, but they won’t replace people, and they will create new jobs too. Change brings challenge, but also opportunity.  The important thing these days is be employable rather than employed. It’s an important difference.

 

10. Thanks for your service.

Are you on track to be debt-free by retirement? Servicing debt in retirement could force you to take larger annual retirement-account withdrawals and to sell a winning investment.  Massey’s research has shown that having a mortgage-free home can mean National Superannuation can provide a simple, modest lifestyle but paying rent or a mortgage in retirement is very uncomfortable.  We may see more people using reverse mortgages over the coming decades.

 

The bonus “golden rule” is this: Good financial advice could be the best investment you ever make.  Whether you need a review, or a ‘sort out’ just take that step and message me on facebook or send me an email.

Good financial advice could be the best investment you ever make.  Whether you need a review, or a ‘sort out’ just take that step and message me on facebook or send me an email.