If you like many had made a new year resolution to get your debts under control during 2013 – you are not alone. Debt management and debt repayment is generally in the top 5 new year resolutions made by Australians. This is a great resolution as high levels of debt can contribute to stress and a personal feeling of helplessness and lack of control.
Not all Debt is the same
It is natural to want to be debt free. Not need to worry about all these monthly payments and not receive hassling phone calls from debt collectors. It is possible to be in debt and feel financially well. One needs to make a distinction between different types of debts. Commonly reference is made to “good debt ” as compared to “bad debt”.
Bad Debt
Bad Debt is also known as lifestyle debt. It may be money you have spend on a holiday, a wedding loan you have taken out. Perhaps it is your credit card balance or some other outstanding bills. These debts were incurred in day-to-day living and need to be paid out ASAP. By leaving these debts unpaid you continue to incur interest costs for no apparent benefit.
In prioritizing debt repayment. Bad Debts should be paid first and in the order of their interest cost.
Good Debt
Good debt is debt that helps you to grow assets and wealth. These are home loans, investment loans as well as possibly business loans. Some of these debts are tax deductible and others are not. The non-deductible debts should be prioritized for payment before the tax deductible ones. For most of us our home loan is not tax deductible and as such the reduction of the home loan principal is certainly a priority.
Whereas good debt helps us grow and asset base and wealth, it still needs to be managed. If you fail to make repayments over your home loan or your investment property loan – the lender is able to repossess your assets and even bankrupt you.
However when it comes to prioritizing debt repayment Bad Debt should be paid out before Good Debt.
Debt Management
If you are carrying a high level of debts and you are finding it difficult to stay on top of all of these, then you may need some professional assistance with debt management. Whether it is simply a question of prioritizing and budgeting or perhaps you may need to consider selling something or negotiating repayments with your creditors to assist with existing financial obligations in the short term.Ignoring a debt problem is the worst thing that you can do as it has the potential to lead to bankruptcy and loss of assets.