Australia is or has been known as the lucky country, we haven’t had a recession since the 90’s and money (credit) has been available in abundance in recent years. We have certainly lived the highlife in the last decade especially in Melbourne which has been voted for many years the worlds most liveable city!
Unfortunately now things are changing with tightened credit and the ever reliable real estate market currently in reverse, times are getting a lot tougher as most Australians are caught holding a huge amount of debt and our friendly banks are no longer as friendly as they once were.
Hoping that the government will step in and provide assistance to help you brace for the impact of tightened credit is a bad strategy.
Now is the time to look at your expenditure, cut back on your bad debt and set yourself up for future success.
You may ask, John why are you writing a blog post about about bad debt and spending habits?
To answer your question: Due to the royal commission the banks now are basically putting you through the ringer to be able to get a loan by going back through your last 6-12 months of bank statements and looking at your monthly expenditure vs how much you’re actually bringing in.
In the past you use to be able to estimate on a loan application that you earned $8000 per month, spent $6000 and saved $2000 and the banks accepted it with a disclaimer of course that you were telling the truth. However the banks are no longer accepting this anymore and they’re now analysing your expenditure to determine whether the information is accurate and if can you afford to service any new loan.
The banks ability to analyse your expenditure is now better than ever because, not only do they see all your direct debits but they now see almost all of your purchases since we have become a tap and pay society. When we were using cash for goods they couldn’t track our spending as good as they can now.
I’m not suggesting for you to do anything illegal here but if you want to be able to lend money to invest and take advantage of the current lower real estate prices, then you’ll need to improve your personal financials.
Let’s get started!
First of all you need to understand that there is two types of debt;
1. Good Debt (helps put money in your pocket)
2. Bad Debt (takes money out of your pocket)
I recommend that you need to look at your whole current financial situation to help map out a plan to knock out your bad expenses/debt so you can free up money to be able to invest or if you don’t plan on investing and just live more comfortably this is a good exercise.
Today we will mainly focus on eliminating bad expenses and debt because we need to get rid of bad habits before we start working on creating good ones. The following tips are a good way to help you knock out your bad debt and expenses!
Below are the Top 10 tips I’d personally recommend:
1. Be truthful to yourself.
You really need to be honest with yourself here when you financially audit yourself:
Are you a financial disaster?
Do you spend more than you earn?
If you were to lose your job or forced to stop work tomorrow, how much money will you have coming in or how long will it take until your broke?
Do you waste money on things you don’t need or get a return on?
2. Stop accumulating more bad debt by spending money on things you don’t really need.
Stop spending on the credit card and don’t take out a personal loan for something you don’t really need.
A lot of debt is accumulated by living above your means, a few big ticket items like living in a house to keep up with the Jones’ or driving that new BMW that will be virtually close to worthless one day.
Not to mention smaller expenses like food and beverage if you eat out a lot can burn a whole in your pocket over the course of each month.
3. Make a list of all the bad debt you owe.
The below four are the most common:
Credit cards (Highest interest rates and should be used very wisely)
Personal loans(Do you really need a loan to buy something or can you wait and save)
Car loan/s (Most new cars lose 90% of there value in 10 years)
Mortgage for Principle Residence (Yes, this thing costs you money every month without bring any money in and for most people is our largest monthly expense!)
4. Become your own book keeper and eliminate recurring expenses you don’t need.
You need to know and keep an eye on where your money goes, a good exercise is to go through your last 6-12 months of bank statements on your personal bank accounts and credit cards to see where you’re spending your money and where you can reduce expenditure to help pay off your bad debt and start to work out how you can free up some surplus money you can use to invest.
Once you’ve gone back through the last 6-12 months it’s then probably best to keep it simple by setting a monthly budget eliminating wastage on things you don’t really need and regularly review it.
When doing this exercise you really need to ask the hard questions like, Why am I living in deficit and accumulating more bad debt? Where is the money going? How can I get to a monthly surplus instead of deficit?
Do you really need FOXTEL? Should I be buying coffees and lunch from the cafe every day? Should I be eating out for dinner 3 times a week? You can eliminate expenses quite easily by looking at your monthly habits and after your first self audit you can basically keep yourself on track moving forward by reviewing regularly.
5. Draw a picture of all your bad debt to map out a plan of attack.
Include the amount owed and the minimum monthly repayments next to the bad debt.
Credit Card $10,000 owed with a $166 minimum monthly repayment
Personal Loan $15,000 owed with a $200 minimum monthly repayment
Car Loan $60,000 owed with a $800 minimum monthly repayment
Mortgage for Principle Residence $600,000 owed with a $3000 minimum monthly repayment
6. Determine the order in which to pay off the bad debts.
It will help to start with the debts from smallest to largest that way you will achieve results faster by taking out one debt and moving on to the next debt.
7. Secondary income.
Find an alternate source of income. This may entitle getting a part time job for a while (e.g. Uber driver) or doing some odds and ends (e.g. Airtasker) or even possibly selling a lot stuff you don’t need on E-Bay or Gumtree. This will help you pay off your bad debts faster!
8. Pay off the first bad debt.
Concentrate on paying off the bad debt which is first on your selected order and whilst focusing on paying off that bad debt you still need to pay the minimum payment on the others ones.
9. Move on to the second bad debt.
Congratulations, now continue to work through the rest of the list but be mindful this will only work if you don’t put yourself in more debt of course.
10. Start using the surplus you have created by wiping bad debts and eliminating bad expenses to invest in cash flowing investments that make you money.
Instead of wasting money again moving forward choose to invest in things that will potentially make you money.
The most common asset classes for investment are;
Real Estate (investment property that cash flows)
Shares (dividend earning shares)
Disclaimer: investing has risk and you should seek advice from your accountant and or financial advisor before making any financial decisions regarding your debt or investing strategies moving forward. The above tips are only ideas from research on the subject that you might consider using after you have done your own due diligence and have received professional advice.
Bonus: Top 10 hacks to help eliminate expenses or pay off bad debt faster.
- Pay your credit card off in full each month
- Don’t be in a hurry to upgrade your house and keep any savings you have in a Mortgage Interest Offset Account to reduce your current mortgage term.
- Pay off your car loan and don’t lease another one in a hurry or again, not to mention get it serviced by a local mechanic instead of a dealer.
- Review all insurance premiums regularly as insurance regularly takes your money and rarely pays out.
- Review all monthly expenses and cut out things you rarely use or don’t really need.
- Consider selling any non performing assets that are liabilities costing you money.
- Get a good accountant to help minimise your taxes.
- Consider buying a coffee machine and eat out less frequently.
- Go on the offence and start trying to make more money by investing (seek advice here)
- Don’t drink, smoke or gamble as much!
I’m not suggesting by any means to live frugal but most people waste a lot of money so the trick is to try and eliminate wastage, stop enslaving yourself to bad debt and free up some surplus money to invest even if you also have to use some good debt to invest.
By cleaning up your personal finances and spending habits you’ll be in good shape to work with the banks new rules on lending and to take advantage of any good investment opportunities that arise.
If you’re in the market to buy or sell a property at any stage feel free to contact me!