Debt management is an important part of money management, especially when more and more people are deploying debt or leveraging their investments for long-term wealth creation.
See Goggling article “Debt, gearing, leverage, mortgage and money management – the simple truth” for more details.
Mortgage debt levels in Australia have been increasing exponentially as a percentage of GDP.
This is not surprising as there is a sense of emotional security with tangible things such as real estate.
When it comes to using debt however, proper money management is the key.
With debt levels spiraling upwards, one must wonder, when will this cycle end? When will we have to deleverage? What will be the consequences? It is hard to know for certain. An article by the University of Melbourne provides some interesting insights into historic property cycles.
There were significant periods where prices have been flat or even decreased. We do not know how things will unfold in the future, given mortgage debt levels in Australia are at levels never seen before in history.
Similarly, interest rates are at unprecedented levels – the graph below illustrates average trends in Australia:
Source: Reserve Bank of Australia
Prudent debt management means that you don’t get into too much debt and still have room to move when the economic environment changes or when something unexpected happens in life.
An appropriate money management plan should cover the following aspects:
- Allocate resources to “Wealth creation via long-term investments”
- “Forward thinking: Contingency plans and protection for your family”
- “Here’s to an Early Retirement: The ultimate option of not having to work”
- Invest in your personal development to ensure that you continue to grow and improve (also dare to have fun, live life to the fullest everyday)
Planning for the above will ensure good financial health and wellbeing.
Lastly, deleverage by reducing non-tax deductible debt such as the mortgage on your home. A good mortgage structure that has an offset transaction account is perfect for that. Every dollar in your offset account saves you interest expense and is not subject to tax. Let’s assume your mortgage charges you an interest rate of 5% and if your marginal tax rate is 47.5%, it means you need to generate about 10% in return to achieve the equivalent post tax return of 5% that your offset account readily provides you with. When using debt, a proper balanced and disciplined approach to money management is crucial.