Debt can be a tricky thing, and is the first step to tackle if you are seeking financial freedom.
Sometimes debt can be as simple as over indulgence. You live beyond your means for a while, and all of a sudden you are struggling to make minimum payments on your credit cards while also meeting your regular bills.
You could also find yourself in debt as a result of a difficult event. A business idea or investment that went badly, a separation, or an accident which puts you off work for a period of time. Many people find themselves dealing with situations which are not of their own making, but which come with a significant financial cost. Some of these situations can be protected against, which is where insurance can play a vital role (here).
Debt isn’t necessarily all bad. Some debt can be a positive thing if it’s helping you to build assets. Business debt to invest in machinery which will increase your profitability can be a prudent decision. A mortgage to buy a property which will appreciate over time can be a great wealth building tool if it suits your situation.
One rule of thumb is to always match the debt with the asset it’s creating. For example, a house has an asset life of 40 years plus, so having a mortgage over 25 to 30 years is reasonable. A car generally has value over 5 years, so a car loan over this timeframe is also reasonable. A holiday has value in it’s memories, but doesn’t have a tangible monetary value, so creating a very tangible debt for this type of experience isn’t the best use of your budget. Planning ahead for your life goals and significant expenses ( link here) can help to avoid debt in these lifestyle areas.
If you find yourself in debt, it can be overwhelming. Financial stress is a large contributor to our overall feeling of wellbeing (1), so seeking help, if things are becoming very difficult, can be a good first step to regaining control. There are many free resources available if you find yourself in dire straights (link here).
If it’s time to simply pull yourself into line and set a solid foundation for your financial future, then you can take some steps to arrest your debt where it is and embark on a debt reduction plan. Use our worksheet (here) to capture and setup a plan to paydown your debts over time. The simple act of taking control of your debt can empower you really move forward toward financial freedom!
Reference: (1) Australian Psychological Society (APS), the Stress and wellbeing in Australia survey 2015