Good debt or bad debt?

Is household debt consuming you?

By the end of 2018 Australia had, relative to the size of its overall economy, one of the highest levels of household debt in the world. At 127% of gross domestic product (GDP), our household debt, as a percentage of GDP, had nearly doubled over the last 20 years.

So, are Australian households groaning under the weight of oppressive levels of debt? For the most part the answer is surprisingly, no. A major reason for the increase in household debt is that interest rates are much lower than they were 20 years ago, so it’s easier to service larger loans. And over 90% of our household debt is owner-occupied home loans and investment loans.

Good debt, bad debt – is there a difference?

Home loans and investment property loans are often referred to as ‘good’ debt because, when used correctly and responsibly, they (usually) improve well being and build wealth over the long term. That said, poor property selection or unfortunate changes in circumstances – borrowing too much, loss of a job or an increase in interest rates for example – can quickly see ‘good’ housing debt turn ‘bad’ or even “toxic”.

Another type of bad debt is lifestyle debt (the worst kind). This has a negative impact on wealth because the debt is being used to buy things such as cars and caravans, clothing, holidays and electronic gadgets or appliances – things that lose value rather than gaining it. In today’s world it’s easy to accumulate bad debt.

Temptation galore – it’s a jungle out there

Credit cards, digital wallets on our phones, payday loans and buy-now-pay-later options all make it easier to spend money, even if it’s money we don’t have. Relentless, targeted advertising, the fear of missing out, the increasing level of peer pressure enabled by social media or just paying for daily essentials are all capable of leading us into spiralling debt.

Is debt consuming you? – these are the signs

Some warning signs that you have a debt problem include:

  • Not paying off your credit card in full each month. This means you will be paying a higher rate of interest on the carryover balance.
  • Your total debt is actually increasing month on month, along with your interest payments.
  • You’re experiencing housing stress. This means rent or mortgage repayments consume more than 30% of your pre-tax household income.
  • You’re using debt to fund basic living costs.

Taking control – make a plan

How to deal with your particular debt problem depends very much on personal circumstances, the amount of money you are comfortable wasting and the time frame you have before it consumes you.

  • Track your spending. Australians buy huge amounts of clothes they don’t wear, food they don’t eat and gadgets they don’t use or even open. For every purchase ask yourself, “Do I really need this or am I buying it to impress somebody I don’t even like?”
  • Consider selling items and junk that you no longer use or need. Maybe it’s an exercise bike in the shed or a third television that you have not used for three years. Either way, you’ll be surprised by the amount of junk you can rid yourself from by hosting a simple garage sale or posting an ad on websites like Gumtree.
  • Take out a lower interest rate personal loan to pay off high interest debts such as credit cards. Repay the loan as quickly as possible.
  • If you have a home loan, make sure it has a linked offset account that you use for everyday banking. You only pay interest on the difference between your loan balance and offset account balance, so all of your money is working to pay down your loan.
  • Review your home loan regularly. You may be able to refinance at a lower interest rate. Check for all the fees involved.
  • Talk to your financial adviser. They can look at your specific situation and recommend strategies that will put you in control of your debt rather than having debt consume you.

Contact Bridges Lake Macquarie today

Divorce

How divorce can affect insurance cover

More than 45,000 Australian couples divorce each year, and almost half of those divorces involve children under the age of 18. Thousands of de-facto relationships will also come to an end. Regardless of the type of relationship it is a time of great emotional stress.

This stress is often intensified by the need to negotiate financial settlements, and with the focus on immediate needs such as funding new living arrangements, feeding children and paying day-to-day expenses, it can be difficult to think about less pressing financial issues, such as insurance. There are, however, good reasons why personal insurances should be attended to as early as possible.

Ask for support

First of all, ask for support. Stress and good decision-making rarely go hand in hand. If you have a trusted friend or family member who can help you take an objective view of your situation, ask for their help and support through the process.

Early on, take professional advice. A Bridges financial planner can guide you through many of the financial aspects of divorce, including insurance. Leverage and use their knowledge and experience as a beacon of light while you’re navigating through the storm. It is crucial that you and your loved ones remain properly covered at all times.

Review beneficiaries before it’s too late

Check who is listed as the beneficiaries on your current life insurance policies. Don’t forget to check if you have life insurance via your superannuation fund. Change your nominated beneficiaries if necessary. One option is to direct that any death benefit be paid to your estate. It will then be dealt with under your Will. That said remember to update your Will, too.

Check your priorities – others may be counting on you!

If you are of working age your most valuable asset is likely to be your ability to earn an income. Safeguarding this via income protection insurance should be a high priority.

If you have financial dependants (usually children) life insurance should also be a high priority. This pays a lump sum upon death that can be used to pay off debts and provide for future living expenses. If, post-divorce, you don’t have any dependants, you may not need this type of cover.

Total and permanent disability insurance pays a lump sum if you meet the policy definition of being totally and permanently disabled. It should be considered, whether or not you have dependants. It is often bundled with life insurance.

The other personal insurance to consider is trauma insurance. This pays a lump sum if you develop one of the medical conditions specified in the policy. It is designed to help with medical and recovery costs.

Strike a balance

While insurance premiums add to the financial stresses associated with relationship breakdown, the consequences of not being properly insured don’t bear thinking about. Use the experience of a Bridges financial planner to help you work out a balance between effective cover and affordability.

Knowing you have the right insurance in place to protect yourself and your dependants means there’s one less thing to worry about, so insurance should be dealt with in the early days of divorce or separation. Your Bridges Lake Macquarie financial planner can guide you through.

Craig Orbell

High praise for Hunter-based Financial Planner

Bridges Lake Macquarie Financial Planner Craig Orbell has been recognised for his commitment to service excellence, being named No.3 in the Bridges Top 10 at its recent National Conference.

He secured the position within a network of over 170 financial planners across the Bridges Financial Services’ network and is the latest in a string of accolades Craig has received during his time with the nation-wide financial planning and stockbroking firm.

Bridges & Associates CEO Nathan Stanton said the Top 10 was a recognition by peers and testament to the calibre of Craig’s knowledge and skill.

“The Bridges Top 10 is considered by our financial planners to be the aspirational benchmark in terms of peer recognition and Craig is deserving of it,” Nathan said.

“We are proud to support Craig in his vision to help individuals and families achieve financial security and peace of mind through sound financial advice.”

“At Bridges, we believe that financial advice makes a difference and this award acknowledges Craig as a high calibre financial planner with a strong, innovative approach to business and a whole-hearted commitment to providing quality financial advice.”

The Bridges Lake Macquarie team has been consistently recognised for outstanding achievement since establishing its office in late 2016. Honours include being named Bridges Branch of the Year in 2017 for the high level of service and support the practice provides to their clients.

On an individual level, in addition to being named No.3 Craig was awarded the Excellence in Advice Award and Risk Writer of the Year in 2018.

“Receiving this award is a great honour and I thank the entire team at Bridges Lake Macquarie who have contributed to the outstanding success we have experienced over the past years,” Craig said.

“Our practice is committed to delivering professional financial advice that helps our clients in achieving their financial and lifestyle goals and this award is recognition of our passion for what we do and the way we go about it.”

Bridges Lake Macquarie specialises in providing investment and retirement planning advice, superannuation selection and management, wealth building strategies, personal insurance, aged care advice, estate planning, retrenchment advice and business succession planning.