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26 June 2019
By the end of 2018 Australia had, relative to the size of its overall economy, one of the highest levels of household debt in the world.
At 127 percent of Gross Domestic Product, GDP, our household debt, as a percentage of GDP, had nearly doubled over the past 20 years.
So, are Australian households groaning under the weight of oppressive levels of debt?
For the most part the answer is ‘no’. A major reason for the increase in household debt is that interest rates are much lower than they were 20 years ago, so it’s easier to service larger loans.
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And more than 90 percent of our household debt is owner-occupied home loans and investment loans.
Two types of debt
Home loans and investment property loans are often referred to as ‘good’ debt because, when used responsibly, they usually improve wellbeing and build wealth over the long term.
That said, poor choices or unfortunate changes in circumstances – borrowing too much, loss of a job or an increase in interest rates for example – can see ‘good’ housing debt turn ‘bad’.
Another type of bad debt is lifestyle debt. This has a negative impact on wealth because the debt is being used to buy things such as cars and clothes, holidays and groceries – that lose value rather than gaining it. In today’s world it’s easy to accumulate bad debt.
Credit cards, digital wallets on our phones, payday loans and buy-now-pay-later options all make it easier to spend money, even if it’s money we don’t have.
Relentless, targeted advertising, the fear of missing out, the increasing level of peer pressure enabled by social media or just paying for daily essentials are all capable of leading us into spiralling debt.
Is debt consuming you?
Some warning signs that you have a debt problem include:
• Not paying off your credit card in full each month. This means you will be paying a high rate of interest on the carryover balance.
• Your total debt is increasing, along with your interest payments.
• You are experiencing housing stress. This means rent or mortgage repayments consume more than 30 percent of your pre-tax household income.
• You are using debt to fund basic living costs.
How you deal with your particular debt problem depends very much on personal circumstances.
• Track your spending. Australians buy huge amounts of clothes they do not wear, food they do not eat and gadgets they do not use. For every purchase ask yourself – do I really need this?
• Take out a lower interest rate personal loan to pay off high interest debts such as credit cards. Repay the loan as quickly as possible.
• If you have a home loan, make sure it has a linked offset account that you use for everyday banking. You only pay interest on the difference between your loan balance and offset account balance, so all of your money is working to pay down your loan.
• Review your home loan regularly. You might be able to refinance at a lower interest rate. Check for all the fees involved.
• Talk to your financial adviser. They can look at your specific situation and recommend strategies that will put you in control of your debt rather than having debt consume you.
The entire June 26, 2019 edition of The Weekly Advertiser is available online. READ IT HERE!
The entire June 29, 2019 edition of AgLife is available online. READ IT HERE!