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February 03 newsletter

Welcome to the Shape of Money's step-by-step programme to discover the secrets to wealth.

This month we begin to look at another secret to wealth: the avoidance of debt.

Debt is merciless in the harm that it can do in reducing our financial wealth.

There are two options that we can implement to ensure that reaching our financial goals is not limited by the negative effects of debt.

The first option we have is to consider the impact of debt before we incur it.

This means understanding both the cost and the benefits of any debt before we sign the contract. Household debt comes in many forms these days so we need to be aware of all types of debt and the cost of those debt arrangements.

According to the report The Net Worth of New Zealanders (Retirement Commission and Statistics New Zealand, 2002), 46% of the population has credit card debt, 29% have mortgage debt, 24% have bank debt, 18% have hire purchase debt and 16% owe money on student loans.

The easiest way to assess the cost of debt is to use some of the Shape of Money calculators, for example, the credit card calculator and the mortgage calculator.

The calculators show very quickly the true cost of the debt. Before signing on the dotted line, consider carefully what the impact of the loan will have on your ability to achieve your financial goals.

Remember that all debt isn't bad. In addition to assessing the cost of the debt, you should also consider the benefit of taking on that loan. In some instances, debt may be helping you reach your financial goals. Debts to fund property investments or increase your education are such examples. However, the cost of debt does need to be offset against the expected increase in the value of these investments.

The second option we have in managing our debt is to continually look at ways to reduce the outstanding debt position. Consider using our debt reduction vs savings calculator.

Some helpful hints:

  • Increase your repayments to pay off as much debt as quickly as you possibly can,
  • Which debt to repay first? The debt that is incurring the highest interest rate, and
  • Review your mortgage every six months. Even a small increase in the level of your repayments can reduce the total amount of interest payments by a large amount (review our information on reducing your mortgage).