From my twenty years’ experience working with family’s finances there’s nothing that gets a person more upset than an unwanted third party reaching in and threatening the sanctity of the household budget.
What challenges us as individuals the most when we’re threatened from outside the home is the feeling that we’re not in control.
Having control over your money means you can make choices with your money that ultimately leads to greater comfort, security and happiness – in other words a richer life.
Less control over your money is risky and while risks are an ever-present reality such as changes in legislation and investment risk, there are some more controllable risks that you can act on now – these are the risks associated with your personal debts.
Household debt in Australia is rising sharply and is highly topical in discussions from interest rates to property prices.
To give some perspective, in 1990 the ratio of household debt to income sat at 70% but today it’s approaching a staggering level of 200%.
In 1990 Australia sat in the lowest 33% internationally of household debt to income yet today we sit in the highest 20%.
The difference has been driven by long term low interest rates and an interest-only culture.
Low interest rates might give a feeling that you’re about to save some money and that some pressure is about to be relieved on the household budget and while this can be true in the short-term, history shows us that unattended financial behaviours lead households to grow their borrowings rather than reduce their borrowings.
Remember those interest rates from the late 80’s or if you don’t perhaps you’re familiar with your parents complaining about the interest rates from the late 80’s? It wasn’t unusual for home loan interest rates to be in the vicinity of 20%, a figure that should terrify anyone today with a mortgage.
Interest rates now are only a fraction of what they were then but what’s interesting here is that there’s no more surplus in the household budget today than there was then.
IN FACT, home loan interest repayments today at a time of record low interest rates compared with household incomes are 21% higher than when interest rates were at record highs in the 1980’s.
You read that correctly: households spend more on interest today with record low interest rates than they did at the time of record high interest rates.
Why? Interest rates might be a lot lower today, but they are charged against a much, much larger debt pie and coming back to the topic of control – you don’t need much to go wrong with your debt before you can spiral well and truly out of control.
Your risks in having debts are varied: risks of rising interest rates, risks of losing your job, being retrenched or getting ill or injured among others.
Being happy with your debts means you’re in control of them and this is where the trick lies because having control of your debts means putting in some hard work. There’s no substitute for this.
Here are 3 actions you can take now to stay in control or maybe take back some control that you’ve possibly lost:
- Increasing your loan repayments so that you’re paying your loan off within 15 years.
If you can’t afford the repayments to do this immediately then increase your repayments incrementally until you reach the required figure eg. increase by $100/month now then again in six to twelve months’ time when you’re able. Keep ‘stepping up’ your repayments until you reach your figure or till the loan is gone. - Change any interest only loans to Principle & Interest so that you are at least making some reductions on your loan principle over time.
When interest rates rise again you don’t want to be stuck with a massive debt. - Never capitalising interest.
Some spruikers say that not making repayments at all is the best way to maximise tax deductions on an investment loan however this is highly dangerous for you because the interest just compounds against you.
Not to mention the tax office takes a dim view of allowing deductions for interest on interest.
Make sure too that your personal risks are covered by taking at least Income Protection insurance. If you lose your income because of an injury or illness there’s not a whole lot of options to repay the mortgage and keep food on the table.
Try taking some time to reflect on the risks facing your household debt and calculate just how much control you really have if any of those risks came to fruition. If the answer is a little discomforting then now is the time to address them, while you have the control.
If you need assistance with taking control of your money contact the office on 1300 376 781 or try our free ebook: 8 Smart Ways To Get Financially Fit
