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Chapter 1: What types of consumer debt should I be aware of?
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This podcast contains general financial advice only. That means it's not specific to you, your needs, goals or objectives so don't act on the information until you've spoken with your financial advisor. You'll find our full disclosure, disclaimer and link to our financial services guide in the show notes. How can four letters bring you so much stress? Today, we're talking about debt. Yes.
D-E-B-T, Kate. These are the four letters. You got it right, Owen. I got it right. Wow. I would have passed grade two spelling. So, these four letters can bring a lot of financial pain and kind of misery to a lot of people for a very long period of time.
And they can hold you back from moving forwards.
Yeah. And so in this Starter Pack episode, we're taking you through the common forms of debt, strategies to reduce the debt ASAP, and some of the things that you can lean into if you need help. Being under financial pressure is one of the most excruciating things. It can affect you physically, mentally. It will take its toll on relationships. It will affect the way you live your life.
And so we're trying today as a community together to help you get the most from your money, to pay back these debts, to feel good about yourself, to feel good about your financial situation. And most importantly, remind you that you can live debt-free.
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Chapter 2: How can I effectively reduce my debt ASAP?
Yeah. So a consumer debt, I would say, would be a credit card debt that you're not paying off each month. So it is growing. And maybe they're starting to charge you 20% interest on that each year. So it does keep going up and sort of compounding, but not in the best direction.
Yeah. And these are really nasty, right? Because they have high fees, high interest, and they're hard to close.
Yeah, and sometimes people get incentivized to opening up a credit card because of the points or the rewards or they're offered a $500 gift card and then they end up getting hooked on this cycle of debt that they just can't catch up with because it's very easy to, if you have a transaction account that's only got $500 in it, that's all you can spend.
Otherwise you have to take some money from your savings account or something like that. But with a credit card, they'll often give you $10,000 credit limit. So you can spend up to $10,000 before anyone actually asks any questions and no one's supervising this.
It just, you can keep spending and spending and spending and you get up to $10,000 and there's no way you can pay that back in a month or two months. It's going to take you years of your salary to pay down that $10,000 or why it's growing in the same process.
And the banks know when you turn 18. They know when income is in your account. They know if you're a good saver because they can see it, right? So they can target you with these schemes and advertisers know this as well. They can put, if you're on a website for debt help, that you'll probably see advertising on that website because you're tracked through the internet.
They'll probably show advertisements for debt consolidation strategies, which as we'll get to, probably aren't necessarily the ideal thing either. So we've got credit cards, Kate. They're kind of the thing that we all kind of jump to. We know they're pretty nasty. We want to get rid of those ASAP. What about this thing called Buy Now, Pay Later?
Yes. So as listeners will probably be aware of things like Afterpay, Klarna, ZipPay, there is so many. If you just look around the trams in Melbourne or the bus shelters, there's ads everywhere for companies where you can not pay for the thing up front, but pay it off in interest-free installments or sometimes there are fees. And interest applied depending on what it is.
Sometimes you can even borrow, you could even pay things in installments over a two year period and like it might be a $5,000 holiday. So it's just an expanding industry. And I think that gets people there. the marketing plays on that materialistic side. So when you see the marketing, it's always to do with get that pair of jeans right now or get that holiday right now.
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Chapter 3: What are the differences between good debt and bad debt?
They can negotiate with the banks. Most banks have a financial hardship team now. especially post-COVID they've had to develop all of these new systems so they can really find a system and a payment plan that works for you because you might find out there's a better way to do it and they are the experts in this area.
So just to confirm it doesn't cost you anything and you can get these people on your side to do it for you if you're the type of person like me who kind of gets the trembles under a bit of pressure, you can actually just go to them and say, hey, this is my situation. This is what I'm feeling. This is how bad it's got. Can you help me? Yeah. And they deal with it every day.
They deal with it every day. So they know the strategies. They know that the banks have certain rules in place for hardship and they can go to bat for you, which is fantastic. There's another type of debt here, which we didn't really mention, which is about loans from family and friends. If you're in that situation, you can talk to them about it as well.
They don't tend to work out too well, but there's a fantastic book on this called The Richest Man in Babylon. It seems weird. The first chapter is bizarre. I found it really weird. It was written over 100 years ago based on stones, the The story of paying down debts written on a stone that was over, I think, 3,000 years old or something from Babylon.
And so they've illustrated through this book the timeless principles of paying back loans and why it can be hard but so rewarding. So there are two other forms of debt which we should talk about. The first is mortgages.
Yes, and the second is HECS debt or HECS or HELP debt that many of Australians who have been through uni or TAFE will be aware of.
Yeah, I've got HECS debt. Do you have HECS debt?
Yes, it's still growing because I went back to study more.
Yeah, so some things to know about mortgages. Mortgages are applied against a house. So if you don't pay your mortgage, the bank takes your house. And that's why the interest rate on a mortgage is lower than it is on say like a personal loan or a credit card because the bank's always got something that they can get their money back from, which is your house.
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Chapter 4: What strategies can I use to manage multiple debts?
And this is just the thing, a lot of this episode we've talked about the tools and the strategies, but the reality is it comes back to you and understanding who you are as a person in order to pay these back. So, you can do it. Just focus on resetting your expectations in some regards and use the budgeting episode we've just done. You can find that in the starter pack.
Use the one on the emergency fund because both of those things will be your ticket out of this longer term. It's going to be painful in the short term. So some episode takeaways is that most consumer debts, that's the credit card, buy now, pay later, personal loans, are a bit naughty. We should try and avoid them if we can. Pay them back ASAP. But it's okay to have some types of debt.
Maybe you're comfortable with a mortgage. Maybe your hex is under control too. That's okay. They're good debts because typically the value of those, well, what we get for them goes up. So when you buy something and it goes down in value, like a car, a TV, all these things, Typically, if you have debt against that, that's a bad debt.
If the value of that thing is an asset and it goes up, in this case, education is still considered an asset because we benefit from it, these are typically good debts. You can manage them still, so be mindful of that. There are two key strategies you can use from a repayments perspective. The stone ball, which is that small amount at first, hack yourself.
Avalanche, which is where you go for the nasty one first. You just confront it and you go, that's it, you're done. Take that one first. Consolidation can be a bit prickly. So make sure you are thinking carefully about who you are and who you're talking to and getting advice before you consolidate. And of course, our gold, our silver bullet for all debt is speak to your financial counselor.
It is totally free to call the helpline as well.
And they even have an online chat function if you Google the National Debt Helpline now. And there is a National Small Business Helpline as well that's been started recently. So we'll put all of the links in the show notes. We've also interviewed a financial counsellor in the past. So that might be a less scary way to...
hear from one in uh in person and then i guess if you're looking to take something away from this episode you are currently in debt for our newer listeners thinking about if you can use that debt snowball or the debt avalanche method um actually just going through writing them all down all your debts yeah it could be a bit scary but you just need to know what's going on so you can work out a plan to deal with it and of course talking to a financial counsellor
Yep, and for more advanced listeners, maybe those who have paid down those consumer debts, and maybe you're thinking, I've got a mortgage, what can I do? I seem in control of my debts. The easiest thing you can do right now is get a better rate on your mortgage. This is something that I need to do. I was prompted by my mortgage broker not too long ago.
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