Hi, and welcome to this week's episode of Money with Alpha. Today I wanted to talk about debt. It's a conversation that impacts all of us at some point in our lives. And with interest rates that have been continuously increasing over the last sort of year or so, it's becoming more and more of a conversation because it's starting to impact our lives even more. And then when you've got that compounded with cost of living as well, the concept of how to manage debt better becomes even more important. Because it's more impactful and you're going to be feeling it a lot more acutely. So I have— there's a couple of different sort of areas to talk about, and so I wrote a few notes down just to make sure I don't forget anything. But it's not just about sort of the debt itself. So I wanted to talk firstly about what you're actually using debt for, because there's a number of different kind of purposes. I know we think about, oh, we want like money now to get something quicker that we can't save for, and that's, that's sort of fundamentally what debt is. But I want us to first explore or what do you actually want debt for? What do you want it to do for you? And then secondly, look at the concept of good and bad debt. What's, what's the difference? What is good debt versus what is bad debt? And then look around your habits and behaviors around debt because that's, that's quite important as well. And then number 4, I wanted to look at debt and managing your cash flow, using it as part of your cash flow management. And that then will also lead into how to effectively use a credit card or not a credit card depending on choices. So that's, that's just sort of essentially what I wanted to cover off today. So there's a little bit in there. So the first thing I'll talk about is what do you actually want debt for? And this is something that I talk about when I talk about money in general. It's like, what do you want money for? There's that initial like piece around clarity and, and actually just thought first. I know a lot of the time, and I'm guilty of this too, whenever we, we think of something, we just like leap into action. We'll just, we just want to do something or, or you know, Yeah, it's a movement. It's a problem to solve where, you know, we either launch into doing or we get stuck in procrastination. And it's kind of this, you know, this lack of clarity is what drives both of those behaviors. I was actually having a conversation with somebody the other day where I'm very much a— I don't like to stay stuck. I don't like to not understand things. If I see a problem, I have to solve it. And it's not always a good thing because not every problem actually either needs to be or wants to be solved. But that's just my go-to. That's my personality and my nature. Is. Problem? Let's, let's, let's dig at it until we try and find a solution. And that goes for all sorts of things, including people, which has, you know, not always been great for me in the past either. You're trying to help someone solve a problem and then you realize they actually don't want to solve it. And anyway, so that's a whole nother ballgame. Or, and I've noticed that this, this particular person was on the other side of the scale where they're like, problem? What problem? I don't have a problem. Let's just avoid it. We're just like 'You know, we'll just pretend it's not there and then, you know, it'll go away. Maybe, maybe not.' So there's— I find this sort of two personalities. And of course I'm talking, you know, extremes, one end to the other. There might be certain problems that you want to launch in and solve because they're quick and easy to solve. You know, the water's dripping, let's turn off the tap sort of thing, you know, or— so it can be very situation dependent, but our natures sort of tend to draw us towards either the avoidance or the diving in. And I have to admit, I've probably practiced the diving in a bit over the years too. So what is it that you want debt for? I'll come back to that one. Do you want it as leverage, you know, to be able to utilize what you've already got and then add to it? Do you want it as a bit of a stopgap to get you through a certain period of time? Do you want it to help you with your day-to-day cash flow? Is it something that is just, you know, you want to be able to pay stuff off in installments? Rather than, you know, that's the part of the cash flow piece. But ultimately, is it to— yeah, is it to consume something or is it to grow something? I suppose at its most simplistic form, what do you want debt to do for you? I remember years ago when, you know, I was early days in my 20s and didn't have a whole lot of money, and I still, you know, I was— yeah, I was a student progressing into life and still wasn't really earning a whole lot of money. And I had a flatmate who— and it was pretty much all her furniture. So when she moved out, I was like, wow, I'm gonna furnish this place. Thankfully I had— I think I, I got a couch off my dad, a fridge off my mum. I managed to find a table and chairs on Gumtree back in the day when that was probably used a bit more than it is now, for like $50, dining table and chairs. But I still needed a washing machine. So I was like, I couldn't get a secondhand washing machine anywhere at the time. So one of the big furniture stores had, you know, the 6 months interest free. I was like, oh yay, that's great. And me being me, I was just like, well, I don't want to pay. I mean, you had to pay $99 to set the thing up, so it wasn't entirely interest-free. Like, there was still a cost to it but it then— but I didn't have the full amount of money, or I could have, but it would have like made me a bit short on the day-to-day. So I went, I calculated what I needed to pay every single month, and then when I get the, the first sort of bill to pay and it, it gives me like a much smaller amount, I'm like, oh, that's I was like, but if I'm going to pay it off in 6 months, I can't just pay that. And then I realized they don't want you to pay it off in the 6 months. They want you to go into the interest period. So they're not going to tell you how much to pay off so that you don't— like, you pay it off in those 6 months. So I had to make sure that I'd calculated that myself and I paid that thing off in the 6 months. But I still used that kind of like debt to help me get over that initial hump of needing something like a washing machine. 'cause I didn't have a laundromat nearby and being able to actually like consume, use it to debt to consume rather than debt to grow. So think about that first of all. And then whenever you go and spend sort of an amount of money, whether you're putting it on a credit card or you're adding it onto your home loan or whatever you're doing, just think about it for a moment first. It's amazing that, you know, what the difference it makes when you think about that in terms of consuming and growing. You're like, oh, well, if I consume this, that means it's not going to growing. What's more important to me right now, the consumption or the growth? So, so that's the first one to think about. And then the second is we're looking at good debt versus bad debt. And you've probably heard this terminology before. And again, it comes down to the growth and the consumption as well. So your bad debt, I'm going to use inverted commas if you're listening to this, is for consumption. So anything that you're putting on credit to, like for something that you're going to consume or a usable thing, like even a fridge or a car or anything that doesn't grow in value, anything that will— you will consume, and in the process of that consumption, the cost of that item will actually decrease or disappear completely. That's, that's sort of like bad debt. Trying to avoid building up as much bad debt as possible because also, generally speaking, the interest rate on bad debt is a lot higher. So you look at your credit cards like, I don't know, I think 12% is probably the lowest interest rate, and they get up to around the 19%. Store cards, like 25% interest so that you really pay for that bad debt. But not only is it not great to have debt on consumption consumables, but you're also paying even like way more for the privilege of it. So whereas good debt has a tendency to have lower interest rates, so home loans, even though at the moment there's probably around the 6%, 5 to 5.7, 6.2-ish percent, that's still a lot lower than, than the amount on a bad debt. Although you are borrowing a heck of a lot more to buy a house, especially in the current climate. So it's just, again, a matter of understanding what do you have and then having that visibility. So that kind of leads into habits and behaviors, which is number 3, which is sort of looking at, well, what are your habits around debt? What are your— what's your behavior? Like, when you— when you do pay that minimum amount, like for instance, the example I gave around the, the washing machine and getting it on interest-free for 6 months, When you get that bill and it says, here's your minimum payment, do you just pay the minimum or do you look at like, well, how am I actually going to pay this off? Not just pay the minimum so that I can actually pay this thing off and not have that debt anymore. Because suddenly, you know, the $1,000 washing machine turns into a $3,500 washing machine once you've paid all the interest. I mean, that's an extreme example, but, but nevertheless, it's, it's interest is still going to be accruing. And then even on things like property, my father had had an investment unit that he'd bought and he'd put it on interest only and he never took it off. So for 10 years he had it sitting as an interest only loan. And sometimes interest only is necessary if you need to reduce your repayments or it's part of a bigger strategy, but you do it for a short-term period. It's— you're really banking on capital growth, which in his case it did grow, but not as much as he probably would have expected it to. And he still owed what he bought it for. And he was surprised. He's like, oh, why do I still owe this amount on it? Because you've only been paying off interest for the last 10 years. You haven't actually paid— you should have paid this thing off more or less by then. So it's, yeah, it's really, really interesting when we've got to understand. So that's the other thing too, is your habit to avoid, or do you want to understand what the repayments are that you're making on things? Do you really understand how the buy now pay later, Afterpay, all of that works? It may seem great in the beginning in that you don't actually have to pay, but there is still a cost if you don't pay. And you, and then also it's, there's the cost in that you keep digging yourself more into debt and, and putting stuff into, onto this, like, oh, I'll buy it now and I'll pay for it later. Rather than, you know, let's see what I can do to actually save for this and then buy it. And understanding how the cash flow side of it is actually working for you and having that real visibility on what's coming in and what's going out. If what's coming in is not enough, to pay for all the things that are going out, you have two main levers. You can get another job or work more hours, or, you know, find a service that people want to pay for and, you know, and start making money that way. So earning more essentially, or you've got to reduce your expenses. So whether that is, you know, canceling some subscriptions in the interim and maybe not getting takeout for a little while or whatever that lifestyle change has to be. And it doesn't have to be forever. That's the thing I want to emphasize too, because Quite often when we feel like we're pulling in the purse strings or we have to make changes, it's a, we've got to do this forever. It's like, not necessarily. Sometimes there is a need to get an interest-only loan on a property for a little while, whether it's your home or an investment. But you don't want to stay there. You want to be able to actually pay it off eventually. So there are some things that you can do in the short term, but just to understand again, what do you want the debt to do for you? Do you want it to get you out of you know, a difficult time? Do you want it to, to give you assets in the future? Do you want it because you've now, you know, relationships broken down and you now need to furnish a home? So you've got to kind of go a little bit backwards before you can go forwards again. So that's, that's, it's really important to understand the situation that the debt is trying to, to assist with. So that you don't stay stuck in that forever because you haven't really connected that situation to the decisions that you're making. So that, that habits and behavior is really, really important when it comes to debt and how you then treat yourself in a way, because you're then going to be telling yourself, I'm the person who only ever pays the minimum. Well, the minimum is designed to suit whomever is giving you the money, whether it's a bank, financial institution, a credit facility, whatever it is. Those things are to benefit them. I'm more concerned about you and making sure that you're taken care of and that you understand what your debt is doing and the impact it's having on your life and where it's keeping you. So work on changing that identity to somebody who has curiosity. You want to— you don't need to understand everything all at once, but if there's one niggling thing, and there probably is in the back of your mind right now, what do I actually not know that I really want to know or understand? Then pick that one thing. And then once you understand that, you can go, okay, all right. Do I need to make any changes to my decisions? Yes, no, or I have a plan for this. Like for instance, I wanna make sure I pay this washing machine off in the 6 months. What do I need to— here was the cost of it plus the $100, and I need to divide that by 6. Okay, do this every single month and I'm gonna make sure my budget fits that in so I can pay this thing off in 6 months and then it's gone. Then I'll move on to the next thing. So it's, it's that, that chunking it down, curiosity, understanding what you want the debt to do. And that's all part of the habits and behaviors that we need to cultivate. Sitting in shame and guilt and overwhelm is not helpful for you. And you can, I mean, there's that whole, you know, you can kind of wallow for a little bit, especially if it's, there's a situation that is not pleasant that if you're going through at the moment. But please don't stay there. Please, please, like, if you can't get out of that right now, maybe save this episode and listen to it again in maybe 3 months and then listen to my words and help, you know, drive you out of wherever you are right now. So then debt and managing cash flow. I'll talk about credit cards specifically in a moment. But it's then a matter of looking at, well, what can I afford right now? And this is, I literally just this morning was making some adjustments to the loan calculator that I have inside the Prosperous app. To be able to allow you to play around with it. You know, what will happen if I pay an extra $50 a month or $100 a month on my home loan? What happens if I chuck, you know, my $2,000 tax refund on there? What happens if I don't have an offset account, if I pay my repayments fortnightly instead of monthly? The difference that that makes, which is huge, by the way. Or huge— significant. So having that knowledge to be able to play with at your fingertips, which is why I wanted that inside the app so that you can actually be informed. Because again, the banks are not going to tell you this sort of thing. Sorry, I'm like gesturing madly in my hand, just like banged on the table as if to make an extra point. But they're not going to tell you this because they make money on the interest. So they're not going to tell you how to save 3 years off your loan or even 10 years off your loan. I had clients recently who, you know, we went through some numbers and it reduced from 22 years to pay off this loan to 11. Like it's literally that level of significance. And it wasn't even a massive change for them lifestyle-wise because it was something that was already being done that just got stopped. So it's like, okay, can we just like restart that again? And they're like, yeah, now that we know the impact, absolutely. I was like, there you go. Now you have the information and the understanding of the impact of that change in behavior and that cash flow impact. You can do this and then end up with the result that you want. But staying uninformed, and I'm deliberately not using the word ignorant because it's not about ignorance, because this information is often not shared. It's just not being informed and being taught what sort of things are available to you, like paying a little bit off on your mortgage, putting the, you know, salary sacrificing into superannuation, putting a bit more into superannuation, having a micro-investing account, doing all these things in parallel that will eventually compound over time. If you look at it on a daily basis, weekly basis, monthly basis, you're not going to see much change. However, over time you will. When I was wrapping up some things for my, my father's estate when he passed away last year. And I'd, I'd been managing his sort of side, his money side of things for about 7 years. And I looked back at where it was to where it ended up and I was like, huh, yeah, I didn't notice. Because every 3 months I would do a performance report or performance evaluation, not that he ever was interested. I wanted to do it just to sort of keep track of things. And I noticed the difference. I was like, wow, okay, yeah, it did actually increase over time. I just hadn't noticed it because it happens so incrementally that I think a lot of the times we underestimate the power of compounding and the power of growth because we don't see it as readily as we should, which is again why I've got a future projector calculator inside the Prosperous app as well, so that you can actually see it now so that you can go, okay, well, 5, 10, 15, 20 years, that's the difference that will make so that you can make that change now and go, wow, okay, I've, I've I've had a little bit of a view of the future, what the future could be if I do this. And if things kind of work the way I planned for them to work, I can be there. Wow. That's really cool. Rather than looking back and going, I wish I'd done this 10 years ago. That is a terrible feeling. Cause I've had that too. Cause I wish I'd started all my stuff 10 years earlier and been a lot more informed at least 10 years earlier, but we are where we are. So that's all we can work with is the here and now. And then what we choose to do with the future. So that's the debt part and managing it and making sure that you're optimizing, paying off the highest interest rate amount first, adding to your mortgage, making sure that you're putting money still into superannuation and investments as well so that you get the benefit of two sides of the compounding, the compounding interest that you pay, but then the compounding returns that you earn. And then finally is using a credit card. 'Cause I do get this question a lot from my clients and how do you effectively use a credit card to manage cash flow? And I find I've got two different kind of, again, camps here. One is the, I don't have a credit card, I don't want a credit card, they're dangerous, I, I can't be trusted with a credit card. And it was like, okay, fine, just stick with the cash flow day to day, like what you've got. You could even— I've even got one, one client who literally takes money out at the beginning of every week, and that's the only money she's allowed to spend. That's what she's given herself. And I was like, that's pretty austere, but okay, I couldn't do that. But if you can, great. And that's why we've got to figure out what works for you. The way I do it and the way I found a lot of my clients like to do it then as well is I use my credit card like a bit of a mini— yeah, loan's the wrong word, but I like to use the bank's money for that period of time and then I pay it off at the end of the month. And then I make sure that my cash flow that I have sitting in the cash part that I have sitting in a bank account that's earning higher interest, that I get to the end of the month with that money in that account. So I earn the interest for the full month on that amount of money. And then I will take it out to pay my credit card bill. And then I've made it so that that timing works because I know what my statement period is. And then I know within a day or so each month when my credit card is due. So make sure that it gets, it gets fully paid, but that I still earn all of the interest on the money that's sitting there. So rather than me paying for stuff as I go, that money sitting in a bank account earning interest so that I've earned a bit of extra money and then I can pay. Credit card from that extra money as well. So that's, that's— but it's important to know what your statement period is, when it starts, when it finishes, and then also when your payment will be due so that you can manage your cash flow so that you're always like a month ahead with your, with your money that you set aside. So I have bills money that I set aside, pay everything on the credit card, and then I take that bills money and then I pay the credit card balance, and then we roll again each month. Which is also why I then have a bills buffer account to cover the stuff that comes more than just monthly, like less frequently than monthly. So it's— once you get into that rhythm, it then becomes quite simple, and you just— it's rinse repeat every month, rinse repeat. And it just— it makes life a lot easier. But I then do actually use the credit card from a cash flow perspective and I've noticed that the banks have— well, at least the one I use has reduced. It's no longer the 55 days interest-free, it's probably closer to like 42. Like, they're basically taking a week off. So it used to be due in the middle of the month, now it's due within the first week of the month. So they, they've changed things, which is okay for me because I'm still always a month ahead anyway. And it's, as long as it's in that same month, then I can still get the interest on the, the money that I had there from the previous month. So that's that sort of debt in a— that's, that's, that was quite a lot there, so you, you may need to listen to that again. I'll have some notes in the show notes as well, but essentially I've just spoken about 5 things. So first is, what do you actually want the debt to do for you right now? And you can ask this question of yourself regularly because it may change depending on your life circumstances. Secondly, what is the difference between good debt and bad debt and how to manage each one? Secondly, what are your habits and behaviors around paying debt down? Fourthly, how do you manage debt with your cash flow? So how does that all kind of work together with, you know, money coming in and then putting the money aside to pay for the expenses and the debt that you have? And then the fifth one was how to use a credit card to help you manage your cash flow in an effective way where you don't pay interest on that credit card, but you're earning interest on the income that you're hanging on to in order to pay that debt. So that's, that's a bit about— that's a very quick debt masterclass in a way. Let me know if you have any questions on any of that or if anything wasn't clear. But yeah, with that, I will leave you to ponder and maybe, you know, start finding out a little bit about your debt. Maybe write a list or find out what your statement period is for your credit card if you've got one. And yeah, just start amassing some of that information that you need to make better decisions. And have a wonderful week, and I'll catch you in the next episode.
