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Money makeover, day five - destroy debt

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by Peter Switzer

A bank, by tempting us with credit cards, is the modern day pariah that seduces many of us into a life of wealth-killing debt. Though I must say I have met people who have used credit cards to kick off great businesses, but, in pure numbers, these people are few and far between.

Credit cards and mobile phone plans suck us in

Don’t get me wrong — debt is essential for most of us when constructing a wealth plan, but not all debt is good.

Bad debt, like a credit card balance of $6000 built up from a Bali holiday where drinking, dancing and eating were the prime activities, only has value if it refreshes you and opens up your mind to money-making possibilities. If it just meant you came home more worn out than before you went, then it’s bad debt.

Destroy debt, before it destroys you or your relationship

A study by AC Nielsen for Relationships Australia found the following financial facts prevailed for three out of four people, who said their relationship had a major problem.

They have less than three months salary to cover any unforseen money crisis.
They fork out more than five per cent of their net income in covering creditors’ demands.
Credit card cash advances are used to pay off other credit card balances.
They only manage minimum payments on credit cards.
They are always copping late fees or over-the-limit charges.
They carry more than three credit cards and all have been taken to the limit.
They have been rejected for credit.

It looks like a case of until debt we do part!

Get smart – it’s in your interest

For credit cards, it is smart to switch from high interest credit cards to low interest ones. My website — www.switzer.com.au — has information from Rate City that looks at the range of interest rates on cards.

If you have debt everywhere, think about debt consolidation. Here, a whole series of small debts at high interest rates could be lumped together into one big loan at a lower rate of interest and over a longer period of time.

These tactics could save you so much interest that they effectively reduce your future debt.

Here is one example that should make you want to be your own debt expert.

National Australia Bank has done the figures on a $100,000 mortgage at 8.5 per cent for 25 years. This would mean a monthly hit of $811 and there would be a total interest slug of around $141,000. By paying an extra $25 a month, the total interest hit falls to $125,300. And if you throw $100 a month extra, the interest bill falls to $45,700.

That’s nearly $100,000 saving for an extra $100 a month payment. That’s only $25 a week! You also knock about seven years off the loan.

Instead of being an expert on all the crap you can read in the tabloid press and in junk magazines, become a debt expert — use mortgage offset accounts, build up tax deductible debt and use debt to get wealthy rather than it sending you to the poor house!

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Monday, December 28, 2009