5 Things I Want You to Know About Debt

In the current world, where interest rates have been climbing, fuel has gone up too, as well as everything else, and debt is one of those things that feels difficult to deal with if you don't understand it.

Here's what I've noticed over the years working with women and their money. Debt isn't usually the problem. The relationship with debt is. And underneath that relationship, almost always, is a lack of clarity.

So I'm going to walk you through five things I want every woman to know about debt. None of this is complicated. Most of it is the stuff banks don't tell you because it doesn't suit them. If you've been avoiding looking at your debt, or you've been paying the minimum because that's what the statement says, this is for you.

1. What do you actually want debt to do for you?

This is where I always start. Before we get into rates and repayments and strategies, just stop for a second.

What do you want debt to do?

Are you using it to bridge a short gap? To buy something you'll consume, like furniture or a car? To buy something that grows in value, like property? To even out cash flow between when money comes in and when bills go out?

There's no wrong answer, but what keeps many of us stuck in the debt cycle, is using debt without thinking about it. We tend to either dive in (just do the thing, sort it out later) or avoid it completely (don't look, don't open the bill). Both come from the same place. A lack of clarity.

I'll give you an example. Years ago, when I was in my 20s and newly in the work of adulting, I'd moved in with a friend, and all the shared furniture belonged to her.  When she moved out I needed to find some furniture!  Like many of us, I took hand me downs from family - I picked up a couch from my dad, a fridge from my mum, and a $50 dining table off Gumtree. But I needed a washing machine and there was no second-hand option. So. I used the 6 months interest-free deal at one of the big stores.

Even though it's interest-free for a certain period, the store doesn't really want you to pay it off in the 6 months. The "minimum payment" they show you on the statement is calculated to keep you in the loan past the interest-free window. So, I did my own maths. Total cost, divided by 6, plus the little $99 setup fee they squeeze in. I paid it off in 6 months.

So yes, I used debt. But I used it for a specific purpose, with a specific exit plan. That's the difference.

Paying off a house is a bit different, and next week I'll be talking about that specifically.

2. Good debt and bad debt

You've probably heard this in some form or other: good debt is for things that grow in value, like a home or an investment property. Bad debt is for things you consume, like clothes, a fridge, a holiday.

The interest rates charged will tell the story on this too. Home loans are sitting around 6 percent right now. Credit cards start at 12 percent and creep up to 19. Store cards can be 25%.

So bad debt isn't just for stuff that loses value. You're paying way more for the privilege of having it.

I'm not saying never use bad debt. Sometimes you have to (the washing machine was bad debt, technically). But knowing what you're doing changes how you do it.

3. Your habits and behaviour around debt

This is the bit nobody really talks about, and it's the one that shapes your whole financial life.

When the credit card statement comes in, do you pay the minimum? Do you ignore it? Do you actually look at it?

Because here's what happens when you only pay the minimum. A $1,000 washing machine turns into a $3,500 washing machine over time. That's an extreme example, but the principle is real.

My dad had an investment property on interest-only for 10 years. He never switched it over. Capital growth was meant to do the work. He was genuinely surprised when he realised he still owed what he bought it for, because he'd only been paying interest the whole time. Interest-only is fine for a short stretch if it's part of a strategy. It's not fine for 10 years on autopilot.

The question to ask yourself is this: am I a person who avoids the bill, or a person who looks at the bill and asks one curious question? Because that's the identity shift. You don't have to understand everything at once. You just need to ask one question.

The minimum payment is designed to suit the bank, not you. I'm more concerned about you, and about you understanding what your debt is actually doing and where it's keeping you stuck.

4. Debt and cash flow

Debt and cash flow are the same conversation. You can't manage one without managing the other.

If your money out is bigger than your money in, you have two levers. Earn more, or spend less. That's it. There's no third option. And it doesn't have to be forever, that's the part I want to emphasise. Sometimes you pull in the purse strings or restructure a loan for a stretch, and then you move out of that phase. It's a tool, not a life sentence.

But, what many people so, is they make a change and never actually run the numbers to see what difference it would make.

I was playing with the Loan Calculator inside the Prosperess app this morning. What happens if you pay an extra $50 a month on your home loan? What if you put your $2,000 tax refund on it? What if you switch from monthly to fortnightly repayments (if you don't have an offset account, that is)?

The difference is not small. I had clients recently go from a 22 year payoff to an 11 year payoff on their home loan. Without changing their lifestyle. Just by restarting something they'd already been doing and stopped.

Banks make money on interest. They are not going to teach you how to pay your loan off 10 years early. That's why I built this into Prosperess. So you can play with the numbers yourself and see the impact before you make the decision to make a change or take action.

5. How to actually use a credit card

I get this question constantly. Should I have a credit card? How do I use one without getting into trouble?

Two camps. Some people don't want one, ever. They've been burned, or they don't trust themselves with it, or they just prefer cash. Stick with what works for you.

The way I use mine is - I use my credit card during the statement period. The cash that would have paid for those things stays in a high-interest savings account, earning interest for the full month. After the end of the month, I move that money out and pay the credit card balance in full. Always in full.

What that means is I'm using the bank's money for free for around 40 days while my own money is earning interest in the background. The credit card becomes a cash flow tool, not a debt trap.

But you have to know your statement period and your payment due date, plus what the conditions are on earning interest in your savings account. And you have to pay your credit card off in full every single time. The moment you start carrying a balance, the maths flips and the credit card starts working against you.

One last thing

If you've got debt right now and you're feeling shame or overwhelm, please don't sit there too long. You can wallow for a minute. Then pick one thing. One question you've been avoiding. What's the interest rate on my credit card? When is my statement period? What would happen if I paid an extra $100 a month?

Just one. Get the answer. Then move to the next one.

This isn't about being good with money. You already are smart and capable, that's not the issue. It's about getting clear on what's actually happening so you can decide what to do next.

If you want to play with the numbers yourself, that's all built into the Prosperess app. And this week's podcast episode of Money with Alpha goes deeper into all five of these.