you're not overcooking yourself.
You might say, ‘Glen, I love doing photography/graphic design/catering on the side and I'm happy to have it as my side hustle long term’. Awesome. Do that. It sounds like a great hobby that you'll get paid for. I just want you to have your own wellbeing in mind. Because if you are on the grind for a long period of time, your finances might be looking pretty, but it might be costing you in other areas of your life (mental health, relationships).
I don't want to treat you, my dear reader, like you can't think for yourself. This is why I will give examples to prompt you and to point you in the right direction. You know how the four examples above will best fit into your personal situation. I want you to be the best version of you. If this means you will be hitting the pub — to pour beer, that is, after hours for a short stint to clean up your debt — awesome.
If you're going to side hustle and are contracting through an ABN, it might be worth setting aside a modest amount of what you earn, say 25 per cent, in a separate online bank account for tax. You can review this as time goes by, but I would rather you have the money sitting in an account ready to pay the Australian Tax Office (ATO) than not having any money to pay a bill come tax time!
Just on side hustles, please remember that you don't need to start a side hustle out of guilt — because ‘everyone is doing it’ — or boredom. People often waste time and money on pursuing side hustles when these finite resources could be used towards other effective goals or investments, such as further study or professional development in order to increase income at your main source of employment.
HECS/HELP debt
Many people under 35 carry HECS/HELP debt — and that's okay. Even if you are over this age, it is still okay. Investing in education is fantastic because it can improve your opportunities in the employment market. If you're working in the area of your study, you've probably found it was a great investment. If not, don't worry — HECS/HELP debt is a very inexpensive loan from the government.
I don't believe you should rush to pay your HECS/HELP debt off because it currently isn't charged interest. However, every year on 1 June the ATO does apply ‘indexation’ to HECS and HELP debt. This means that your HECS/HELP debt is adjusted each year so the debt maintains its real value to keep up with changes in the cost of living in Australia. The government has loaned you money for your studies and annual indexation ensures that the government doesn't lose money to inflation over time. In 2021 the indexation rate was 0.6 per cent and there were different repayment rates (ranging from 1 to 10 per cent) depending on your annual income.
For example, if your debt was $25 000 on 1 June 2021 the ATO would apply the indexation rate of 0.6 per cent and increase your HECS debt by $150 ($25 000 multiplied by 0.6 per cent). An annual income of $60 000 attracts a compulsory repayment rate of 2.5 per cent, which means that your employer would withhold $1500 to give to the ATO. This would have been applied against your HECS/HELP debt when you filed your tax return for 2021.
You may think it will take 20 years to pay off the HECS/HELP debt at that rate, but if your salary doesn't increase at all over 20 years, you may have bigger problems to worry about!
Two other reasons for not paying off this ‘indexed loan’ with voluntary payments are as follows:
Any debt dies with you (RIP). Any extra payments made towards your HECS/HELP debt will not flow through to family or dependants following your premature death. You could have paid that extra money down on your mortgage, super contributions or other investments — and that money would then flow through to your estate beneficiaries (as either cash or assets, which may have possibly grown over time).
Voluntary HECS/HELP repayments are not tax deductible to you. You can't claim them on your tax return and benefit from paying less tax.
It is my prediction that at some stage in the future a new government will move to change the current policy so that a deceased person's estate must clear the remaining debt. But even if this does occur, I would not change my view on not paying it down early.
To be clear: you can't inherit HECS/HELP debt!
In terms of your HECS/HELP debt, the repayment amount is only based on your income, not the total amount of outstanding debt. This means, regardless of whether your HECS/HELP debt is $150 000 or $5000, the compulsory repayment amount would be the same.
When you might pay off your HECS/HELP debt early
The amazing thing about personal finance is that it is exactly that — personal. There is never a one-size-fits-all approach, although that would make it easier to write this book or host a personal finance podcast.
In my somewhat ‘professional’ opinion from my past life as a financial adviser, I believe you could consider paying off your HECS/HELP debt early with voluntary payments under the following circumstances.
You have a small amount of HECS/HELP debt left relative to your overall situation, and the repayments are affecting your borrowing capacity for a mortgage.Banks and lenders don't assess the ‘amount of debt’ left to be paid. Rather, they assess the amount of your income that is compulsorily withheld by your employer and given to the ATO to service the debt based on your income. For example, if you had $5000 of HECS/HELP debt remaining, paying the HECS/HELP debt down could free up that extra bit of servicing income (once you report to your employer that you no longer have any HECS/HELP debt so that they stop withholding that extra repayment amount). A quality mortgage broker would help you assess the impact on your borrowing capacity and whether early payment of a HECS/HELP debt is beneficial in your circumstances.
You have an employment relationship that allows pre-tax salary sacrifice of HECS/HELP voluntary repayments. This effectively means you can pay this debt down with ‘pre-tax’ dollars. The wash up of this is akin to being able to claim post-tax voluntary repayments on your tax return. But I would consider ensuring that your other short- and medium-term financial goals are taken care of before doing this.
You have met all your other short- and medium-term financial and lifestyle goals and you just want to swing back around and clear the debt for ‘housekeeping’ sake and to free up withheld amounts being taken from your pay.But remember: the payments are not tax-deductible and additional payments would be ‘wasted’ (see explanation above) if you die prematurely.
For the last two points, I certainly would not be considering paying HECS/HELP debt back voluntarily if you have other consumer debt. Run your debt snowball first.
The truth about credit scores in Australia
‘Will paying off my debt affect my credit score?’
‘My credit score is important!’
‘How do I increase my credit score?’
‘I need to get a loan to get a credit score!’
These are common statements that I have heard or that may have slipped out of your own mouth. Australia is heavily influenced by the USA in its culture, and their society and financial system is built on the back of the credit score system. In the USA, you need a credit check for house rentals, car insurance, home insurance, health insurance and even some online dating profiles! It's everywhere! And the concern about credit scores has crept into Australia. Let's break this down.
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