To be debt free is a key goal for many of us, however it’s important to recognise that there is both ‘good debt’ and ‘bad debt’.
You can read more about the difference between the two here.
For those who have a range of different debts, it can be an overwhelming feeling. We have ranked and outlined each below in order of importance, i.e. how quickly you should be aiming to get them paid off.
The first step in outlining your debt repayment strategy is to outline exactly what your debts are. Include the interest rates, terms and to whom the money is owed. You can then begin to rank them in order of importance, as we’ve done below for you.
- Credit Cards: This can be one of the most painful forms of debt that we can enter into, with interest rates often north of 10% (at the very least). It’s not tax-deductible, and certainly falls into the ‘bad debt’ category. If you’re someone who regularly pays off your credit cards every month, and you use it to accumulate points, then there is no issue here. However if you’re unsure of how you ‘maxed out’ your cards and how you’ll repay them, then it’s time to consolidate, use it responsibly (or not at all) and repay it as soon as possible.
- Store Loans: These typically contain interest-free periods with no repayments for ‘x’ months. Most people will have seen or entered into one of these ‘opportunities’ thinking they could repay it later, or just simply ignore it. Get these debts paid off as soon as possible and avoid any nasty surprises.
- Family Loans: This category of loan may in fact rank as the highest priority, however it does depend on your own circumstances. If your parents have given you a loan to purchase your own home and don’t expect a repayment, then it may not be a priority, while a large loan from the in-laws may create a very different sense of urgency.
- Personal Loans: These are typically for discretionary items like holidays, cars, clothing and accessories, and also fall under ‘bad debts’. Pay this debt back as quickly as you can.
- Tax Debts: You may owe the tax office some money and this is certainly not one to ignore. Late repayments, particularly in Australia, will accrue fines and interest, which continue to compound. Speak with your Adviser or the tax office directly and come up with a repayment plan.
- Business Loans: If you’re running your own business, you may in fact use a business loan to finance your activities. Ensure that your business and cash flow strategy includes repayments.
- Home Loans: A home loan is a loan on your residence and is typically not tax-deductible. It is generally a sensible idea to have a clear strategy outlined of how you will reduce your non-deductible debt over time, while making use of your deductible debt, now and in the future. Speak to an Adviser about this strategy.
- Investment Loans: Whether you’ve used an investment loan to purchase equities or an investment property, ensure that you have factored into your financial plan how and when this loan will be repaid. It will typically be tax deductible and can be a great strategy to magnify your returns, in the right conditions. Make sure you’re aware of how and whether a margin loan is possible given your scenario.
- Student Loans: A student loan can be an excellent investment in your future growth. Be aware of the repayment conditions and ensure that you know what rates and penalties can apply. If you have a HECS debt from Australia, make sure you’re aware of your reporting requirements from 2017 which we’ve outlined here.
Household debt in most developed nations around the world is climbing at record rates, and most people don’t have a plan to manage it. Make sure that you’re taking the necessary steps to manage and reduce you debt in the right ways.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Independent Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
Book a complimentary consultation here.
Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
General Advice Warning: The information contained on this web site is general in nature and does not take into account your personal situation or financial objectives. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Any taxation, legal and other areas referred to on this website are of a general nature only and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.