I’m feeling an arctic breeze blowing through my world, but I can’t hear the “Happy Feet” tapping of penguins. I’m feeling a little vulnerable, a little skittish.
Actually, I’m feeling a little like Tinkerbell. Peter Pan warned the kids that if Jane stopped believing in fairies, “Tink’s light’s gonna go out”. She’d just plain disappear.
A recent survey shows Australians have developed a sudden allergy to debt. It’s like our New Year’s resolution for 2013 was to cut down on credit.
Dun & Bradstreet’s quarterly Consumer Credit Expectations Survey shows the intention to take on new debt in the first few months of this year has fallen off a cliff. From a slightly above average 26 per cent of the population six months ago, it’s fallen to 18 per cent, the lowest in at least three years.
(If Australians stop believing in debt ... does Debt Man disappear? There’s that chill again.)
D&B says we’re swapping debit cards for credit cards. We’re consciously paying down debt. Discretionary spending is being culled.
That’s great. But why now?
The real credit crunch was several years ago. We blinked on debt for a while in 2008, and then again in 2010, when the world was collapsing, the RBA was raising rates and it seemed an economic blitzkrieg was set to wipe out our pretty little economy.
Maybe this time we’re serious.
These stats confirm a broader recent pattern. While D&B is trying to predict future credit demand, the Reserve Bank’s own figures show historical demand, to the end of last year, was falling considerably also.
Have we acquired SDA (sudden debt anaphylaxis)?
It’s not necessarily a bad thing. Particularly if it means that we’re offloading, reducing, or not asking for as much debt of the “dumb” variety.
Dumb debt is that used for purchases that answer no to both of these questions. Is the purchase tax deductible? Will the purchase increase in value?
That means pretty much everything you can put on a credit card. Strike out cars. Strike out furniture, TVs and most consumer crud.
Then there’s “okay debt”, which answers yes to one, but not both, of those questions. For example, homes increase in value and work-related cars are a tax deduction.
“Great” debt is for purchases that are both a tax deduction and (should) appreciate over the longer term. Think investment properties and shares.
The debt that kills most Australians’ finances is “dumb” debt. Credit cards are too easy to get. Getting higher credit card limits is too easy.
Getting in-store loans for furniture/electronics? The qualification seems to be that you’re breathing and you aren’t currently on day release from the local penitentiary.
Targeting the right sort of debt to pay down is critical. Simply knowing what order to pay down debt can save you thousands of dollars a year.
If you’re joining the sudden debt anaphylaxis herd, all power to you. Here are six rules about paying down debt.
Firstly, write all of your debts down on a piece of paper.
Categorise them all under the labels of “dumb”, “okay” or “great”, as per the qualifications above.
If you’ve got multiple dumb debts, then put them in order of highest interest rate to lowest. Pay them down from top to bottom. That should be your only priority for now. Dumb debt is usually the debt on which the highest interest is charged and on which you’ll pay the highest after-tax cost.
Stop buying more expensive cars than you need. Buy something with cash, or spend (and therefore borrow) less. Cars blow up money faster than creating midgets.
If there’s no dumb debt left, start targeting the “okay” debt. That’s usually either your home loan or work-related cars or equipment.
Only when all of your dumb and okay debt is paid off should you even consider paying down your investment (“great”) debt. And often, for tax purposes, it might not make sense to pay this down even then.
There won’t be too many Gen Xers who are debt free. But if you are, then it’s time to start investing. And that’s often going to entail entering the “great” debt phase in a serious way.
But also understand that debt is not the devil. It’s a tool. And used correctly, for the right assets, it can be a powerful, even Jedi-like, force for good.
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Prominent financial adviser Bruce Brammall’s background is in journalism, where he spent about 15 years writing nationally for News Limited’s business and news sections. In 2006, he left to become a financial adviser and, in response to the success of Debt Man Walking, started his own financial advice consultancy, Castellan Financial Consulting where he now deals with a national client base.