Debt Free is the New Black
Debt free is the new black
Are you draped in post festive fiscal red? With January credit card statements having now arrived, you may be turning your thoughts to getting out of the red and embracing debt free black. It’s also likely that if you have lost post-festive battles against lingering high interest rate personal debt in the past, you are wondering how you can make this year different.
Take heart. With a personalised debt reduction plan, which draws on lessons learned from lost battles, the war against red can be won.
Just like the golfer who never gets a lesson and wonders why he never improves, one can’t expect to reverse the effects of overspending without direction, discipline, commitment and reflection.
Be honest about your spending habits. Are you really likely to forgo the good red, the daily cappuccino or cut back on entertainment expenses? Tracking your spending with a cash flow monitoring tool will give you a realistic view of where you can make savings.
Once you’ve identified discretionary cuts, plough those savings into automated deductions for debt reduction. If you have multiple credit cards, dedicate all your spare cash to paying off the one with the lowest balance first. Boost this debt reduction by switching out your existing high interest card to a no frills zero or a low interest rate card for the first 12 to 18 months.
After winning the battle against high interest rate finance, use the same automated process to flex your debt reduction muscles on your mortgage. Begin with a home loan health check and call your broker for a better deal to potentially save thousands on interest payments.
Other simple measures, which have no impact on lifestyle, include making extra payments, using an offset or redraw account, or switching from monthly to fortnightly or weekly repayments. Given that most loan accounts accrue interest daily and charge monthly, simply making repayments more often will reduce your monthly cost. Facilities such as offset and redraw accounts, which offset savings against a loan balance, are a great way of reducing mortgage interest.
Mortgage holders over 57 may consider if they can reduce debt by utilising their superannuation. Once preservation age is reached, those with a mortgage can access up to 10 per cent of their super for debt reduction through a transition to retirement (TTR) income stream while they are still working. Retirees, or those over 65, can utilise an account based income stream for debt reduction.
Be mindful that accessing money through retirement income streams for debt reduction can have pitfalls. While the income and assets supporting an account based pension are tax free, the same assets and income for a transition to retirement income are subject to tax.
Pay As You Go Withholding Tax (PAYGW) is paid on the taxable component from income streams by the member before they reach 60 and the fund also pays tax on the income and assets when paying a TTR. Also, regulations introduced in 2017 have put greater limitations on getting money back into a super fund and it may take a long time to rebuild assets taken out for debt reduction. Whether debt reduction via superannuation or focusing all efforts on building your superannuation asset – as opposed to paying off your mortgage – is a better option for those over 55, depends on each person’s situation.
Take for example, a couple with a $500,000 mortgage at 4 per cent who will pay $20,000 interest annually. If this money remains invested in a superannuation fund that returns 8 percent, it will generate a far greater return than it would if it is used for debt reduction.
Regardless of your situation, obtain independent advice about a debt reduction strategy that delivers the best outcome for your circumstances.
And, with discipline and dedication, you may just be wearing the new black before 2019 is out.
Get in touch with our wealth coaches in Perth at McKinley Plowman.
As appeared in the West Australian’s Money section on January 28.
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