payday to payday and been in a debt cycle since their 20s or 30s. At the risk of sounding like I have no empathy or emotion to get the point across, some people like David have just been a frog in a pot boiling over the past 30 years and it is only at age 63 that he has actually realised that he is boiling and it is probably too late to do anything significantly helpful.
The issue with David's situation is not the debt itself. We often assume that the debt was the problem and I imagine David may have thought this too throughout his life. But David was planning to retire in only a couple of years at age 65. He asked me, ‘Should I refinance the mortgage to clear the personal loan and car loan?’ In other words, should he consolidate the debt into his mortgage because the debt is the problem.
The problem was that from a very young age David and his wife had done three things:
they had never managed their money responsibly — which led to
living on more than what they earned — and
they continued to refinance their debt into their home mortgage and then restarted the cycle of accumulating further debt.
I reached over to the phone to call 000 because I was concerned that David was about to have a heart attack in my office when I told him there wasn't much I could do for him. You see, people think coming to see a financial adviser gives them a ticket to this magical world of rainbows, sunflowers, unicorns and a wand that removes their debt. This is far from the truth. I have no magical tickets or wands.
I am being a little dramatic here. I did tell David this:
At that time, earning $70 000 per year basically gave David and his wife an after-tax income of approximately $1056 per week. Due to their debt, they had been spending more than $1056 on a weekly basis.
I had to explain to David that he didn't have a lot of options. At the time that David was planning to stop working full time, his superannuation ($130 000) would need to be withdrawn to clear the mortgage debt ($100 000) and repay most of the personal consumer debt ($32 000) because he would have no other additional income source to repay those loans. This means David would be retiring at age 65 (his intention) with a paid-for house (great!) and the age pension, but no other assets to produce any extra income. Also, David would not be able to apply for more debt to fund any lifestyle luxuries, fun or other stuff because you need a job to get a loan (to show the lender that you have the capacity to repay it).
This is why it's important to get rid of credit cards if you have a problem with them well before you retire. In my opinion, any loan given to a person solely receiving the pension should be illegal!
In the usual circumstances, a couple retiring in Australia today would normally receive around $718 per fortnight each in government support, aka the Age Pension (this is the maximum and how much they receive depends on their assets other than their home). We would plan to top up the pension payment with a small additional amount each week from their own retirement savings so their standard of living in retirement remains largely unchanged. Since the retirement savings would be depleted due to clearing the mortgage and personal consumer debt, if David wanted to keep his current car (worth $30 000 with a loan of $16 000), his only remaining task before hanging up the tools in a couple of years would be to repay the car loan and then try to learn how to manage money while slowly adjusting to a much lower income.
To be honest, there was not much I could do for David and his wife other than offer some practical help with budgeting and cash flow and try to help them change their habits and behaviours during the last couple of years that David would be working. Further, I suggested to David that if he did like his job and felt he had the energy and health to keep working, he should consider only a transitional semi-retirement at age 65.
What does David's story mean to you reading this? If you are in debt and you are not imminently close to retirement, you have one thing that David and his wife did not have: time. Time to change your behaviour and stop overspending. Time to attack your debt and decide that you are breaking the cycle and you are not using consumer debt ever again. Time to learn how to manage your own money. Time to live on less than you earn. Time to systematically invest money, even smaller amounts, over the long term, to assist in retirement.
If you don't have debt, life will reward you. You not only get to leapfrog people in debt to start investing, you also get to live life on your terms, not tied down by repayments. You are also entitled to this shortcut in reading my book: skip the rest of this chapter and move on!
I want to also acknowledge that there are some members of our community who are older and who did not have retirement savings available to them during some of their working life. If that is you, it's okay. We're here now — let's get on with it.
You'll hear many people suggest that consolidating your debt helps solve your debt problem. I'm sorry (not sorry) to say: it doesn't. You've just moved the debt from here to there. By combining a car loan, credit cards, personal loans, financed cars or furniture and rolling them into your mortgage, for example, it feels like you have made things simpler. But you haven't — the debts are still there. The best thing to focus on is paying the debts off completely, one by one (using the Debt Snowball method explained later in this chapter). It is also important that you look at your spending plan and change your habits. You must stop the potential for any future debt creation by nailing your habits now. Don't let any further consumer debts accrue. The best kind of consumer debt is … none.
Good debt, bad debt and ‘life debt’
I hate debt. The thought of something or someone hanging over me that can cause me to change my situation or strategy without my control just irks me. I do have a mortgage on my home; and the mortgages on my investment properties are principal and interest loans (I talk about this in chapter 7) because I want the debt paid as soon as possible.
Now I am not a debt junkie. I don't believe in consumer debt or ‘bad’ debt. I don't even like using a credit card, like the ‘financially savvy’ people out there who use cards to get points and pay them off immediately so no interest accrues, blah blah … I just don't want crap hanging over my head.
When I read books about people who have purchased a million properties in 10 minutes and so on, I always think, ‘Why wouldn't they de-risk and de-stress and only have half the properties without any debt?’ Anyway, this isn't about my property debt philosophy — I am just using this opportunity to drive home the fact that I don't love debt however ‘good’ it is claimed to be.
When you hear other ‘money people’ talk about ‘good debt’ and ‘bad debt’, it can be summarised as follows.
Good debt: Debt where the interest is tax deductible as the debt is secured against an appreciating asset. Likely to be used for wealth creation and has a low interest rate. Sounds good!Examples: investment property mortgages, a loan to buy shares, business loans
Bad debt: Debt that has interest (usually quite high) that is not tax deductible and the debt is not secured against an appreciating asset or any asset at all. Sounds bad!Examples: car loans, personal loans, buy-now-pay-later products, credit cards, interest-free store cards
I believe there is a third category of debt, which I like to call ‘life debt’. This debt is sometimes just part of a functioning life in our society. This type of debt is not tax deductible, but it doesn't fit into the two traditional good/bad categories of debt.
The two main life debts I am talking about are your home mortgage and your HECS/HELP debt.
