Debt is like a cancer that at first may seem like it isn’t even there. It has no impact on your day-to-day life. However it quietly builds up and up in the background until you can no longer afford to even make the minimum set payments. However by the time that this stage occurs many people have no option but to consider a debt agreement or even bankruptcy.
Dangerous credit card behavior
Do not be fooled into thinking that your debts are in check if all you do is make the minimal credit card payments every month. You are effectively on a hook with credit card providers and they will eventually milk you dry of any money or savings. Credit cards should be cleared at the end of every month. If you have bought things on a card that you can not afford to repay in full at the end of the month, you need to consider whether that was an essential purchase and how else it could have been funded. Majority of credit cards in Australia are offered at rates above 20%. You will never pay this rate if you simply use the card as a cash advance and repay in the interest free period. Once you commence ayng monthly interest on the outstanding debt your purchases start costing you very dearly.
If you do not have the discipline or the financial ability to repay the debts that you incur on your cards at the end of the month then you are either poor at managing your finances and may need assistance, or you are living beyond your means. Both situations are a problem.
Using debit cards instead of credit cards can prevent overspending and help you regain control.
Dangerous personal loan behavior
Taking on a personal loan to pay for a wedding, a holiday, furniture or anything else that is not a growth asset is simply not a good idea. Personal loans allow you to do things today which you are not able to afford as yet. However if you continue to live beyond your means, before long the problem will grow. The loans will be there and you will continue to pay interest on these leaving you with less money to live on. Therefore you will be out looking for more loans to help you meet the costs of living. We see people every day who through poor advise start out taking numerous loans which stop them from getting ahead financially for decades.
Loans that help you grow wealth are worth taking. Loans that help you live the life that you can not as yet afford are not.
Dangerous mortgage behavior
Do not over-extend when it comes to mortgages. While taking out a mortgage does allow you to benefit from potential capital appreciation of a real-estate asset, borrowing more than you can afford can land you in hot water. Do not assume that because your loan has been approved, that you can afford it. Your lender may not be aware of your plans to have children or switch jobs. Do not borrow too much.
The other issue with mortgages is using your available redraw facility. In today’s economic environment, property prices have stagnated. If you redraw money from a mortgage that was approved 5 plus years ago, you may find that your debt to the bank is higher than the value of your home. Did you know that if you sell your house for $350,000 while your debt to the bank is $375,000 – you will need to repay the $25,000 from other sources.
Where do you want to be financially 10 years from today?
Think about where you would like to be 10 years from today. If you wish to be debt free then there are steps that you need to take today to help you get there.