One of the biggest barriers to creating wealth is dumb debt; that is, high interest, short term, avoidable debt.
Avoid taking on more dumb debt. Don't use debt to buy non-essential items and if you have to borrow, find the lowest cost option
Last week, the Commission for Financial Literacy and Retirement Income launched a campaign to educate New Zealanders on the implications of dumb debt and how to get rid of it. Research by Colmar Brunton shows that 42% of New Zealanders with credit cards do not pay them off in full each month. Reserve Bank figures show that interest-bearing debt on credit cards in April this year equalled $3.6 billion. That's a lot of debt for around 4 million people.
Having dumb debt means you are paying interest to your lender that could otherwise be available to cover your living expenses or to save for such things as holidays and retirement. While seasonal sales are a great time to shop and save money, making your purchases on a credit card can lead to you paying more than full price. For example, if you buy a pair of shoes for $280 using your credit card and only ever make the minimum monthly repayments, the Commission has estimated it will take you over three years to pay them off and the final cost, including interest at current average rates, will be around $351.
Getting rid of dumb debt involves three steps:
Make a repayment plan. Rank all your debts in order of their interest rate and plan to pay off the debt with the highest interest rate first.
Manage your mortgage. Only borrow what you need and pay it off as fast as you can
For tools and resources to help with these steps, go to www.sorted.org.nz
Liz Koh is an Authorised Financial Adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847. For free eBooks, go to www.moneymax.co.nz and www.moneymaxcoach.com