This month as part of your financial spring clean and progress to Your Financial 2017 (the year you take control of your finances) we are looking at how debt and repayments work to help you understand debt better. Getting on top of your debt is a great way to build your wealth, especially if you are looking to have the best Financial year in 2017.
Tip:Last month we gave your net worth a boost by searching for lost super and we took care of our affairs by speaking with our advisers about wills, medical directives and beneficiary nominations (if you missed it, check it out here).
Conduct a Debt Stocktake
How much Interest did you pay on all of your debt in the past 12 months? Do you;
- Know the exact amount to the cent?
- Have a good idea, but not an exact dollar figure?
- Have No idea – you just pay what the banks asks for every month?
Hopefully, you answered either A or B. If you answered C…good thing you’re reading this.
A debt stocktake is a great way to figure out how much interest you are paying. Interest is an obvious part of borrowing money, but it’s smart to know how much interest you are paying, the difference between good interest and bad interest and ways to make your loan repayments more effective.
- There is good debt and there is bad debt. Good debt or productive debt is the kind of debt we use to invest with. Basically, we are using debt to invest in assets that will later provide us with an income, capital growth or both. We hope this will outweigh the amount we have made in repayments in the long term. Bad debt is the kind of debt we use to pay for lifestyle expenses – think clothes, dinner, cars etc – basically these purchase have no financial return, and long after we have consumed the purchase, we are left with the debt to repay.
- You can pay back more than the minimum. In many instances you are able to repay your debt faster (there are few cases where this may not be possible though). Why pay back more than the minimum? Because paying the minimum means you will pay back more interest in the long run – it’s as if you are penalised for taking longer to repay the debt.
- The interest rate you have is negotiable. A high interest rate on your debt is bad, as it means you pay back more interest and less principle, over the long run. However, you can negotiate a lot of debt to get a better interest rate. If you have a mortgage broker, you can look at alternate mortgages. If you have a credit card or a personal loan, you might be able to get a better card elsewhere or you may be able to roll your personal loan into your mortgage, to get a better rate – while loans can have restrictions, you can still be smart with your debt to work in your favour.
What to do?
- Sort out your bad debt from your good debt. Understand which debt is which and then use this as a guide to organise the loans in order of worst to best. Consider paying down the worst loans first, and work your way towards reducing your productive or good debt.
- If you have surplus cashflow look at paying down debt faster. Debt can be expensive to keep – especially when you look at a credit card with an 18% (or more) interest rate. Getting rid of this debt should be a priority if you have surplus cashflow available.
- Negotiate your interest rate. The art of the deal is knowing what the other party wants. Your loan provider wants to keep you, after all you are paying them interest for the loan – so sometimes just asking your current provider for a discount works. If not, there are plenty of alternative loan providers around. If you don’t have the time or unsure of what to do, you can engage a professional broker to negotiate your loans. Keep in mind, if you go it alone, make sure you understand the terms and conditions of your loan – especially any penalties you may incur if you make changes.
Confused? Seek Advice
Even those of us who are financially savvy can benefit from seeking advice from a professional who deals with debt everyday – you can speak with a mortgage broker at Perron to discuss your options and determine the best way to crush your debt today.
Checking over your debt is a big task – so only 1 task for this month – but don’t worry, we’ve got more tips coming to ensure you have the best start to Your Financial 2017.