Sort Your Money Out. Glen James
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1 debt and how to get out of it
tl;dr
Never, ever consolidate debt. I'll tell you soon why this is a very bad idea.
There's good debt, bad debt and ‘life debt’.
I'm not a fan of car loans. The car yards have signs that read ‘Cash for cars’ — this should be your life motto too!
Keep making only minimum repayments on your mortgage until you are out of consumer debt.
Consumer debt is money that's borrowed to pay for products which are then consumed (e.g. personal loans, credit cards, buy-now-pay-later programs, store cards, car loans and holiday loans).
Don't worry about HECS/HELP debt … for now.
The truth about credit scores: should you be concerned about them?
In my view, BNPL (buy now pay later) products are the payday lenders of this generation and can cause you to think you are good at managing money — but honestly, they are financial cancer.
I would only consider loans from family and friends if you have absolutely no other option — and make sure everything is in writing.
Debt and mental health: overspending can put you in a dark place, but it's okay to seek help.
If you want to skip the summary about types of debt and all that, page 16 has my 5 steps to get out of debt.
My view on debt? I don't like it. I don't buy into ‘good debt’ or ‘bad debt’. While many financial commentators talk about these two types of debt, for me it's all one category: the category of ‘I'd rather not have it or need it’.
According to the Financial Review, in May 2021
31 per cent of Australians reported being under financial stress, meaning they had difficulty paying for essential goods and services. This was higher than the 26 per cent who say they are just making ends meet.
In March 2021, the Financial Review also reported that ‘[b]orrowers with high levels of debt-to-income experience high levels of mortgage stress and are more likely to default’.
Being debt free is a major goal for so many people. It's important for two reasons. The first is a hard and fast reason: if you have consumer debt you're overspending and to make things worse, you're paying interest for overspending. It's like you're playing poker and are about to double down, but you're on the Titanic so things are about to get much worse. It's a lose-lose situation. It also makes no financial sense to be in consumer debt, borrowing for items that are going down in value. We all know this but many of us have been caught in the trap. This is because it's more about behaviour than ‘sense’, which leads me to the second reason that it's important to be free of consumer debt. You will become a different person; you will likely cease to be just a consumer and be more focused with your life. Your spending plan will be in order, you will have more money to put to things that matter (future you!) and you will honestly feel like you're making progress in your financial life.
Now you may be asking yourself, ‘What about investing? What about shares? What about buying a property?’ No. No. No. Everything else is on pause. Because nothing else matters if we can't get your debt and spending habits under control first.
Debt consolidation: a cautionary tale
David came to see me in my financial advice practice when he was 63 years old. David was married and his wife was not in the workforce and was not present at the meeting that day. David was clearly a hard worker and I would assume he had been his whole working life. He had come to see me for some pre-retirement advice. Depending on the circumstances, age 60 can be a magical time for financial planning due to superannuation rules. However, the most magical age to start planning your future is now, if not yesterday. Not at age 63.
Most of the time as a financial adviser, I did not really care in a ‘clinical sense’ about the backstory which had led to a client's financial situation. Sometimes if there was a big, juicy lump of money involved I might ask to satisfy my own curiosity, or it might naturally be raised as a talking point. If a client had a significant amount of debt, I might also enquire to learn what had been the cause of it so it could be addressed and hopefully avoided in future. I tend not to ask too many unnecessary questions because you learn early on in financial advising that if you ask too many questions and give people an inch, they take a mile and tell you their entire life story, which tended not to be relevant either to me as a person or to providing financial advice. My approach with clients was mostly, ‘we are both here now — let's deal with what needs help’.
I assumed that David's financial backstory would have been pretty boring, fairly common and typical, so I didn't ask.
The current financial situation for David and his wife was as follows:
Annual household income: $70 000
House value: $550 000
Mortgage remaining: $100 000
Superannuation: $130 000
Personal consumer debt: $32 000
Savings: less than $5000
Car value: $30 000
Car loan remaining: $16 000.
You don't need to be an economist or personal finance expert to look at David and his wife's personal financial situation and know they were not in great financial shape to retire comfortably. There were many potential reasons and common reasons why this was the case. For example, a 63-year-old may have been self-employed for most of their working life without making superannuation contributions and only recently changed to salaried employment, which would explain the low superannuation balance. They (or their now adult children) may have suffered a significant medical event earlier in their life that had derailed their savings. Maybe they had been sued and had to declare bankruptcy and start over at some stage. Who knows?
Usually, people will tell a financial adviser about a big event that had greatly affected their finances as a way of explanation. But David didn't offer any explanations, stories or even excuses. Unfortunately, the most common backstory of people in situations such as David's is that they have spent more than what they earn, lived payday to payday and been in a debt cycle since their 20s or 30s. At the risk of sounding like I have no empathy or emotion to get the point across, some people like David have just been a frog in a pot boiling over the past 30 years and it is only at age 63 that he has actually realised that he is boiling and it is probably too late to do anything significantly helpful.
The issue with David's situation is not the debt itself. We often assume that the debt was the problem and I imagine David may have thought this too throughout his life. But David was planning to retire in only a couple of years at age 65. He asked me, ‘Should I refinance the mortgage to clear the personal loan and car loan?’ In other words, should he consolidate the debt into his mortgage because the debt is the problem.
The problem was that from a very young age David and his wife had done three things:
they had never managed their money responsibly — which led to
living on more than what they earned — and
they continued to refinance their debt into their home mortgage and then restarted the cycle of accumulating further debt.
I reached over to the phone to call 000 because I was concerned that David was about to have a heart attack in my office when I told him there wasn't much I could do for him. You see, people think coming to see a financial adviser gives them a ticket to this magical world of rainbows, sunflowers, unicorns and a wand that removes their debt. This is far from the truth. I have no magical tickets or wands.
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