From debt ridden to debt free

Bryce: [00:00:28] Welcome to Get Started Investing where this summer we're taking a journey to financial freedom. Supported by CommSec, the home of investing. Over six episodes we'll be talking about the practical steps you can take today to set yourself up for that ultimate goal. Fire, Financial independence. Retiring early. So if you're enjoying your summer break or dreading heading back to work, join us as we take the steps today to ensure we can build the life we want into the future. My name is Bryce and as always, I'm joined by my equity body, Ren. 

Alec: [00:00:56] How are you? I'm very good, Bryce. I'm very excited to take this next step on our journey to financial freedom together. We're not like we're not sharing bank accounts, but we're on the journey together. And this is a step in the journey that we've both gone through from debt ridden to debt free.

Bryce: [00:01:16] You can't build a financial foundations when you're in debt, and we talk about how to get out of it. 

Alec: [00:01:21] Well, I mean, ironically, we went from debt ridden to debt free and now we're back in debt again. 

Bryce: [00:01:28] With the House.

Alec: [00:01:29] Well, you have a house on this apartment. 

Bryce: [00:01:30] Well, as we discuss in this episode, we talk about it. We talk about the different types of debt. But anyway, having the right support on your journey is important, which is why we're very proud to partner with CommSec for this series. We know that it can be daunting to get started and the feeling of investing hard earned dollars can be scary, but starting small is a good way to ease the nerves and get going. With CommSec, you can get started with as little as $50 in the bank and set up regular investing to help build your portfolio over time. Visit CommBank accommodation for more. 

Alec: [00:02:01] Now, before we get started, we need to remind you that while we are licensed, we're not aware of your personal financial circumstances. Any information on this show is for education and entertainment purposes only. Any advice is generally. 

Bryce: [00:02:12] Alright Ren, what will gonna to learn today?

Alec: [00:02:14] We'll have a clearer idea of what debt we should pay off. First, we'll understand what we mean when we talk about good debt versus bad debt, and we'll have a framework for deciding when to pay off debt or when to invest. So let's get practical. 

Bryce: [00:02:32] Love it. Alright, Ren, we're not on this journey alone and there are thousands of people listening to get started investing just like you at home and taking similar steps. 

EM Community: [00:02:43] Hi equity mates. My name is Alex and 29 years old, and this year I paid off my student health care. The only debt I have left is my 700 K mortgage. But recently my wife and I decided that our goal was to pay off our mortgage as quickly as possible with the goal of paying it off in under ten years. The premise behind this is to save over 500 grand in interest. We're about to fall off our mortgage cliff at the end of next year of a really appealing rate of 1.99% of the budget to stay on track. I don't necessarily believe in early retirement as such. However, I do definitely think there are benefits to clearing debt to create some better cash flow, allow for other investments and just a better quality of life. Thanks. In terms of debt, you made every mistake that you could just about make. Did the classic car loan when I was 19 for like $17,000 at like 12% or something, Ludacris eventually paid that off. And then I started working, earning more money, started living beyond my means. And I had a credit card. Not not a lot of debt, but two or three grand and just hung around for like a year and a half. Like doesn't take much. It's pretty crazy how it can just snowball because if you buy one thing that you can't necessarily afford when you use your paycheque to pay it off, then you've got to use your credit card for your groceries. And it just it just kind of snowballs. So that that took like a year and a half to pay off 33 grand. I never paid any interest on it, but it just yeah, it's suffocating.

Alec: [00:04:22] So, Bryce, I guess the starting point for this episode is why talk about debt to begin with? You know, like there could be a number of places to start this conversation. It could be building an emergency fund, it could be get your budgeting right, it could be focussed on your cash flow. It could be try and get a high paying job. Like, there are a lot of, you know, this this series is all about a journey to financial freedom. Why are we starting with that debt? 

Bryce: [00:04:50] Debt is the handbrake on your journey to financial freedom? 

Alec: [00:04:55] Put that on a bumper sticker as well. 

Bryce: [00:04:58] Debt sucks psychological and financial resources away from you that you could otherwise be focusing on building wealth, building an emergency fund, building your financial foundations. And there are two key things to that. 

Alec: [00:05:13] Debt is the quicksand that erodes, even the strongest financial foundation. 

Bryce: [00:05:19] Wow. Debt is the quicksand that erodes your financial foundation. 

Alec: [00:05:24] Even the strongest financial. 

Bryce: [00:05:25] Strongest funder. And at its core, it's because debt accumulates and it compounds and yeah, it erodes your chance of growing wealth. Now, what do we mean by that? If you have bad consumer debt, let's just take that as an example. Credit card debt home. Not home loan, personal loan. And you fail to a service that debt correctly, you're going to get charged interest on it. We all know that. And that interest accrues month on month, on month. And if you get it, if you let it get away from you, that debt is just going to continue to compound. There's no break on that debt and you're going to need to put more money into servicing that and trying to get that back to zero before you can even focus on putting money into your emergency fund or into your stock market, into the stock market. So that's why it is super important that we focus on debt.

Alec: [00:06:17] Yeah. So I think let's talk about how you'd assess your debt situation. I mean, we've both been there. We've both had credit cards. Do you have credit cards now? 

Bryce: [00:06:29] I have a credit card now. 

Alec: [00:06:30] Didn't you cut it up when you.

Bryce: [00:06:32] We cut it off? When we cut it off. When we had to go through the application process. 

Alec: [00:06:36] Oh, you cut it again. 

Bryce: [00:06:37] As soon as we got one. We bought one. 

Alec: [00:06:39] You bought. Sorry. As soon as you got one.

Bryce: [00:06:41] As soon as we got the mortgage, we got the card because we knew we had large expenses coming up. Harriet didn't have any frequent flyer points. 

Alec: [00:06:49] Okay, so. 

Bryce: [00:06:50] We've played the game. We got the card that got you 120,000 frequent flyer points or whatever. It was paid for the large expenses that we needed to pay for. Close the card, chopped it out so. Well, that's the plan. We still have to wait for that window where you actually get the points. But as soon as that comes, chop it up. So that's how we manage it. But I can tell you Ren, that has not always been my experience with credit cards. I got into not a world of trouble, but I've experienced the psychological weight of a credit card during university where I probably lived beyond my means at some point throughout my university experience and relied on the credit card to get the movie festival ticket that the music festival tickets or go on that holiday overseas and then didn't really have the cash flow or probably prioritised putting the cash towards other things and let the debt run away from itself. And it really got to a point where I was in this debt trap of paying off the card, but using all my money to do so and then not having enough money to then get away from relying. And then I use the card again and get into trouble. And that was just this vicious cycle until one day I was just like, Bryce, this is just ridiculous. You're smarter than this. You know what handbrake this has on? You're actually putting money in the stock market and so consolidated it into one of the bank accounts that, you know, they offer. If you consolidate your debt to us, we'll give you X period of time interest free to allow you to try and pay that off. And I just committed that over that 12 months or whatever it was interest free. I'm not going to get a better offer than that. I'm going to pay off this credit card. 

Alec: [00:08:31] So was it consolidating like was it multiple credit cards that you consolidated into one or was it just you took a 19% per annum interest charging credit card and you just started it? 

Bryce: [00:08:44] It was that. Refinancing or what they call it. Balance transfer thing. 

Alec: [00:08:51] Yeah, I think that's a good like really practical step for a lot of people. It's move it to an interest free account for a period. It will only be for a period. Aggressively try and pay that down as quickly as possible. And then I guess say where there's another interest free offer. 

Bryce: [00:09:09] If you can.

Alec: [00:09:09] Yeah. Well did they sometimes. Then lock it up for a certain period of time. 

Bryce: [00:09:13] No I don't think so. No. But you just need to be careful because any of these new offers on credit cards, you can't have been a Customer within 12 months. So you can't go between banks too often. So yeah, that was my situation from it. And I was so psychologically scarred from that that I have consciously made a decision now on how I will use credit cards. And I think it takes you a long time to well, you know, it takes good sort of understanding of your cash flow and sticking to budgets and those sorts of things, in my opinion, to then realise that you actually don't need one. You just live within me. Yeah. And once you feel comfortable living within your means, then you never need to rely on a credit card. We use them for travel, for those sorts of things. 

Alec: [00:09:59] But like now, like there are obviously people out there who they just like, you know, their expenses are too high, of course, going up and stuff like that. And I think there's not there's not no great solutions, but there is help available. And I think something that we're going to talk about a few times throughout this episode is that a lot of people have heard about financial advisors, far less people have heard about financial counsellors, but they do deserve a lot more recognition because they can really help you if debt is a problem. The starting point is the National Debt Helpline 1800007007. But there's a lot of resources out there that won't charge you anything that is there to help you. So I think, yeah, that that's something that we'll probably hit a few times when we're talking about debt. But, you know, you got out of it.

Bryce: [00:10:49] Got out of it, yes. And that has now really helped me understand what debt is good for me and what is bad for me. And not all debt is bad. And we'll get to that later. But yes, I got out of it and. And I'm more than happy that I've done it. What about yourself? Do you have any experiences with debt? 

Alec: [00:11:08] Yeah. I mean, I had the same credit card experience. Wasn't actually at uni. It was when I started working at Coles. So flybuys is the bonus points. And as a Coles team member you got double flybuys points. And then if you had a Coles credit card, you could double again. Four times the flybuys points. So I sign up for a college credit card and then similarly you just like the spending got away from me a little bit and eventually I just stopped using it and it took me a little while to then pay it off and like the interest was annoying. It wasn't a horror story, but it was just a dumb moment. 

Bryce: [00:11:54] Well, we've both paid off debt, and that probably brings us to the next point, which is if you are in debt and you want to get rid of it, there's a question of which debt should I be paying off first? Because she might have a student loan, you might have a credit card, you've got your mortgage. There's multiple instances where debt can show up in your life. And the psychological impact of that could be large and could be a mindset that you need to overcome. So how should we think about paying off debt? 

Alec: [00:12:22] Yeah, so there's two ways that you can approach it. No right way. It's just whatever works for you. But the first is the financial way, and then the second is the psychological one. So the financial way is just how do I give myself the best financial outcome? And it simply says, Line up all your debts, look at the respective interest rates and pay off the ones with the highest interest rate first, because they're the ones that are going to be costing you the most. They're going to be the ones that are eroding your purchasing power the most, and they're the ones that will compound the quickest if you don't pay them off. So in general, you're probably looking at credit cards as being the most expensive. And so you'd be focusing on, you know, paying off your credit card before your mortgage, for example. So that's number one, the financial way of doing it. The second way is the psychological way of doing it. Now, this was popularised by Dave Ramsey, the finance radio host over in the US. His method is the snowball method, and he says, Line up all your debts, but line them up by the balance size, so the size of the debt. So, you know, you might have a credit card being smaller and then mortgage being larger, you might have a personal loan, you might have a car loan, line them up by this size. And he says pay off the smallest balance first and then the second smallest and the third smallest, because what that will do is it will build momentum. You'll feel like you're getting on top of your debt and then you will start feeling better. You'll build good money habits, and then it'll become easier to pay off each successive debt. There is nothing more daunting than trying to pay off your mortgage. First could be, you know, hundreds of thousands of dollars and then having all these other debts still hanging over your head afterwards. So that's his approach. 

Bryce: [00:14:20] So Ren, once you've determined how you're going to tackle your debt and which one are you going to pay off? There are two things you need to think about. A, actually a debt repayment plan and committing to that and then factoring it into your budget, there's no point saying I'm going to pay off my credit card. I've just done the balance transfer and I've got 12 months interest free and then you don't make any behavioural change to actually pay off that card in that period of time. You need to make the mindset change and factor it into your budget and it may sting for a bit, but I'm telling you from experience, tackling it head on, you will not regret it. So budget it into your budget and be conscious of a repayment plan. 

Alec: [00:15:00] Yeah, nice. And I think, you know, the final thing to say again is if this feels too overwhelming, there are resources available to help you. Financial counsellors are trained to help people get out of this. They know of the best resources, the best, you know, interest free periods, the best government support. So 1800 007 007 is the number to call. But yeah, this is why it's the first step. Yes, because if we don't take this first step, it can erode all the work we do with the other steps.

Bryce: [00:15:34] Yes, your journey to financial freedom will be severely hindered. But let's take a listen to some of the community who have been in this position and got out of debt. 

EM Community: [00:15:44] Debt can be a big, scary thing for us. We have been working on it and paying it back. We saw interest rates rising and to us it was worth putting that money into debt instead of actually investing it into stocks or that type of things. You know, we had $900,000 worth of debt and we're down to 550. And that's been over the past few years that we've been in that down and about. I also grew up through a ten years drought. I'm a farmer, so it was drummed into me through my teenage years that it was really important to diversify and make sure you can service your debts in times of, you know, market downturns or, you know, price of stock or whatever your job is kind of thing. Yes, that's my take on our debt structure. Hey, equity mates, I only have my HECS debt, which is about 20,000 and I have a credit card that is usually about a couple of hundred that I put charges on every month. I basically just do that to pay bills and get frequent flyer points. But I do know that if I don't watch that religiously, it can very quickly escalate. So I have to just be very, very mindful. When I was younger, that definitely racked up to a couple of thousand on a credit card and it took a lot of work to pay it back down. So it's just something I'm super conscious of and quite vigilant about. 

Bryce: [00:17:07] Now, before we talk about the different types of debt and how you can use it as a tool to grow wealth, we want to say a big thank you to CommSec. There's no reason to go it alone on your investing journey and CommSec offer the support and information to build your confidence and make the right money moves. Start small and invest with as little as 50 points through the CommBank app. Visit CommBank.com.au For more. CommSec stays and surveys and other fees and charges apply. 

Alec: [00:17:39] All right. Welcome back to our Get Started Investing Summer Series. We are on the journey to financial independence. Over six weeks. We're going from I actually don't know what we're going from in to, but we're going to financial freedom in this episode. We're going from end to something. We're going from debt ridden to debt free. As we said earlier, the reason that we're starting with debt is because if we don't deal with debt, it can erode even the strongest financial foundations. Glad I remember that. And look, there's there's nothing easy about getting out of debt. That's the biggest challenge. It's so easy to get into debt. I know it can be so much fun getting into debt. I know, but it's not fun getting out of it. But then I guess the thing is, the question is once you sort of in control of your finances and your cash flow, you're paying that down. Then there are some interesting questions that come up around debt, the idea of good debt versus bad debt, and then the idea of when we should be paying off debt and when we should be investing. And then finally, you know, if debts at all, how do we use it? So let's talk about that. And I guess let's start with this good debt, the bad debt dichotomy. 

Bryce: [00:18:54] The way I look at this is good debt is debt that you use to buy assets or make investments that are going to give you a return and put you on your path to financial freedom in a structure that makes sense. And why I say that is because I still don't think it's a good idea to slap down a credit card to buy stocks because of the nature of how credit cards charge. 

Alec: [00:19:19] Can I suggest a simpler formula than this? Yeah. Good debt is when the expected return is higher than the interest payments. Bad debt is when the interest payments are higher than the expected return. 

Bryce: [00:19:31] Or no return at all. 

Alec: [00:19:32] Well, that's. Yeah, yeah, like that. So it's the formula. 

Bryce: [00:19:35] So any consumer debt where you're taking out debt to buy consumables, those sorts of things, bad debt, good debt examples would be mortgages or loans that you can take out to buy stocks in the stock market, for example. Also your student loans I would classify as good debt making an investment in your education whilst the absolute return on that you can't necessarily quantify but I would park HECS and student loans and uni loans in in good yeah here in Australia.

Alec: [00:20:05] Yeah I think I think that's very fair to say. So there is such a thing as good debt. That can be a tool that we use. And so the question is, when should we use it? And I think we've kind of answered it. It's too when we're building more wealth than we're spending on the debt, on servicing the debt. So investing in education, you mentioned buying or investing in assets, real estate stocks, starting a business. There's obviously risk involved with some of the some of those especially starting a business and stuff like that. Going into debt to start a business is difficult. I think our biggest lesson from starting equity mates is not going into debt and also not quitting your job and trying to do it on the side for as long as possible and using the cash flow from your job, because then you don't need you don't feel the need to create cash from the business from day one. 

Bryce: [00:21:03] Well, episode five Ren, is where we talk about side hustles that paid off big time.

Alec: [00:21:08] Okay, great. Well, I'll save all of that. But if we're going to use debt to start a side hustle that pays off big time or invest in our education or invest in assets that we think will generate a return. There are some considerations. 

Bryce: [00:21:24] Yes. Firstly, affordability of repayments. Can you actually afford to pay off the debt with the cashflow that you have? Secondly, interest rates you need to be if the formula is the return is better than the interest rates and interest rates obviously factor in. You don't want incredibly high interest rates on the debt that you're taking out. You obviously want to understand what you should expect in return for taking out this debt and investing. And then also, I think the time horizon is crucially important when it comes to using debt to build wealth and the assets that you're buying in. But most importantly, I think having an emergency fund in many situations is a good thing. But particularly if you are playing with debt, having an emergency fund is crucially important to give some level of safety. And I think to close out there, the main point of this episode, and the focus here is to get out of any debt that you're in, not to leverage up and go out and spend a whole heap of money to supercharge your journey to financial freedom. It's to get rid of the handbrake that debt might be having on you to building an emergency fund and creating a positive mindset to actually then go out and start investing in the stock market. So focus on that. Get out of debt and then you will certainly be well on your way to a financial freedom, financially free future. 

Alec: [00:22:45] Nice. So I think the final question then is, let's say we've paid off our quote unquote bad debt credit. We've chopped up the credit cards and all of that, but we have maybe a mortgage, maybe an investment loan in life. We've got some debt that we can for the repayments, and we're using it to buy assets or maybe student loans like we've got X or help debt. When. What's the thinking around using extra cash flow? We have to pay down that debt faster or investing it in. Other options. Superannuation into the stock market. Whatever it is. 

Bryce: [00:23:28] It comes into the form that you spoke about earlier, Ren. If you have a mortgage and you're tossing out whether to put more money into it or invest, if you think you will get a better return investing in the stock market or whatever, whatever asset it may be, a better return on that than your actual interest rate on your mortgage, then that is the point in time where you can consider it. If you're getting a 6% mortgage, the long term average for the stock market is 8%, then you're getting a better return overall by putting your money, your excess money in your mark in the market. If your mortgage is 6% and the long term average for the stock market is 2%, then you're financially better off tackling your mortgage. 

Alec: [00:24:12] Yeah, keep in mind that it's and you've got to think about after tax return.

Bryce: [00:24:17] Absolutely. 

Alec: [00:24:19] But yeah, that's the thinking. So I think that gets us to the end of this step in the journey from debt ridden to debt free. I think the key takeaways here are the reason that we start with debt rather than some of those other places to start, which are all very valid places to start. But just the eroding effect it can have on our financial base and also our psychology. The some of the steps to get out of debt, but most importantly, the fact that you're not alone in this. The financial counsellors are available and that they're incredibly underutilised. I mean, they're incredibly busy, but I think there's a lot of people that don't use them that could benefit from them. So that number to call is 1800 007 007. And then finally, thinking about debt and understanding the nuances of good debt versus bad debt, where we can be a bit more comfortable with it and how we can think about some of our options. What do we pay down first, when do we invest rather than paying it down and stuff like that? Now, Bryce, as we finish up, we want to say a huge thank you to CommSec for supporting the series. Hopefully together we can show you a path to how you can tap into the world of investing to build wealth over the long term. CommSec provides all the support, information and resources you need to build your confidence and make the right money moves. Sign up today to get $0 brokerage on your first ten trades for Aussie markets and invest with as little as $50 through the CommBank app. Visit CommBank.com.au for more CommSec agencies and other fees and charges apply. 

Bryce: [00:26:00] Stick around. Next episode we're talking about baby steps getting started and how to get started in a cost of living crisis.