It’s the dreaded ‘D’ word – debt, and it’s on the rise in Australian households.
According to OECD data released in 2015, the level of household debt to income in Australia has doubled over the past decade, from 104% to 212%. The average wage in Australia is presently $78,583 per annum, indicating that we Australians are clocking up a habit of spending more than double of what we actually earn.
Australia’s personal debt is now among some of the highest in the world – fourth only to Denmark, the Netherlands and Norway. Figures from 2016 calculated our country’s total personal debt to approximately $2 trillion, suggesting the average Australian household is $250,000 in debt.
Where does all the debt come from?
1. Mortgages This is a big one. In fact, 56.3% of personal debt in Australia stems from mortgages,according to ABS. It’s estimated that 36% of households have a mortgage and even fewer own their home outright.
2. Investor debt - the only kind of good debt we believe This type of debt arises from investments such as shares and rental properties, making up 36.5% of debt in Australia.
3. Personal debt
Personal debt and personal loans are attributed to consumer items such as cars, and often holidays.
4. Credit card debt Credit card debt makes up 1.9% of Australian household debt.
5. Student debt
Student debt, widely known as HECS or HELP loans, is particularly common with growing rates of higher education students, making up just over 2% of household debt in Australia.
Why are we so scared of debt?
We associate debt primarily with the pain of paying for something we have long had the pleasure of enjoying or acquiring, i.e. the dream holiday, or flash car that we’re still paying for years later.
However, there’s a different kind of debt that most of us don’t really understand. For many the prospect of investing and borrowing money to invest is scary and misunderstood. The common mentality is ‘why should we focus on investing when we could be focusing on eliminating our debt in the first place?’
This fails to acknowledge the link between investment and growing one’s wealth. It’s time to face the fact of our modern economy: building wealth by solely relying on income just isn’t realistic.
Making debt an asset
The word ‘debt’ is riddled with so many negative connotations it’s hard to believe that it can actually be a positive thing. But once you make the distinction between ‘good’ debt and ‘bad’ debt, you’ll realise that not all loans have to detrimental to your financial circumstance.
Good debt is used for long term wealth building. Accumulating ‘good debt’ usually relates to borrowing for assets that go up in value over time and in circumstances where the debt is deductible under tax law. For example, borrowing money for an investment property that will ideally increase in value and provide a passive income through rental monies is considered goo debt.
Bad debt will damage your long-term wealth. This type of debt is not attached to any assets and is usually a good indicator that you’re spending more money than you can afford. Don't rely on your credit card to pay for the non-essentials, as this will only support an accumulation of unnecessary debt.
What can we do?
Whilst it looks like our negativity surrounding ‘debt’ isn’t going anywhere anytime soon, it’s important to remember that some debt can be productive and assist in achieving your financial goals. Change your mindset, and have a go at categorising your debt into ‘good’ and ‘bad’ so you can prioritise your debt management.
There are so many ways to eliminate debt quicker than lenders and banks would like us to know. If you are in debt, reach out to us and we’ll show you how you can take short cuts to getting back on track.