Australian household debt is the highest in the world. And at an all-time high at the time of writing. The ratio of household spending to income is now above 200%. Yes that means on average people are spending double what they are earning. .
How did we get here and how does this affect your ability to manage your money?
Now averages can sometimes be a little bit misleading and clearly most people aren’t spending double what they are earning. But spending includes debt that is taken on and personal debt includes mortgages, investment debt (money borrowed to fund shares or investment properties), personal loans, student debt and credit card debt. The housing boom in particular means some people have borrowed very heavily pushing up their spending dramatically. So overall household debt is rising very rapidly for most Australians.
At this time of year credit card debt often balloons as people entertain and buy gifts for friends and family.
It used to be that most retiree homeowners entered retirement without a mortgage.
Those days are well and truly over, with recent data from the Australian Bureau of Statistics (ABS) survey of income and housing showing, for home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14% to 47%. Continuing to pay down a mortgage whilst funding your retirement, without a regular pay packet, is no picnic.
How to manage this?
The most important understanding of debt is to ask whether it is ‘good’ or ‘bad’ debt.
Economists typically describe ‘good’ debt as that which is used to fund an investment that will earn more than the cost of the debt. Examples are investment mortgages, as long as house prices are increasing, funding share purchases, assuming the gains outstrip the interest on the loan.
‘Bad’ debt is money borrowed for consumption – in other words, if you need to borrow to fund your lifestyle, you are technically living beyond your means. And this is unsustainable.
Recognising and reducing your ‘bad’ debt can be difficult, but it is also the quickest way to controlling your spending. Not paying off your credit card on time also helps bad debt to balloon, and the more you owe, there is even more you will owe when next month’s statement rolls around.
Arthur’s credit card nightmare
Our client Arthur’s credit woes escalated when he missed a payment, and then couldn’t cover the full amount plus interest in his following statement. This led to heightened anxiety as he didn’t wish to share this oversight with his wife. The interest required ballooned out of control over a period of 18 months, by which time he was in total denial. Luckily, they had a term deposit due for rollover and he finally mustered the courage to share the full extent of his debt. They used part of the cash balance to pay off his card and he now uses a debit card, with which it is impossible for him to get into the same sort of trouble. Was his wife angry? We don’t know, but we do know that denial is never a useful strategy when it comes to debt.
There are four other key aspects to getting your spending under control:
- Know how much you spend on a weekly and monthly basis
- Work out your current debt level, reduce or remove the ‘bad’ debt, and establish a plan to pay down your good debt
- Create a doable budget for your other household expenditure
- Commit to sticking to this budget for a minimum of a month, then review your situation, revise the budget if necessary, and commit for another month. This will soon become a good habit
Seek advice. Analysing your expenditure, reducing debt, renegotiating rental agreements and restructuring your mortgage are serious projects. It’s not surprising if you feel overwhelmed at the very thought. Having an independent qualified adviser help you work through the changes you can make is a great support.
Maybe your spending is unsustainable. Checking how long your retirement income will last is the first step to making changes if this is the case. There is no limit to the peace of mind this can bring.
And if it all seems too hard, why not chat with a qualified adviser, with whom you can confidentially share your concerns?
Read the fifth big mistake.