Debt is an interesting topic and something that I love talking about to hear other people’s views and beliefs around. Often we grow up learning either to copy what our parents did – because it worked, or doing the opposite – because it didn’t.
Debt isn’t a topic a lot of people are comfortable discussing, however I’m lucky to have a few friends, and a fabulous Mr. Balance to chat to about our money mindset and beliefs on a regular basis. One thing I have found very interesting during discussions about debt is how people view it so differently and how each person’s relationship with debt is unique. Some people are completely against taking out any form of debt (besides possibly a mortgage) and you can see them physically get uncomfortable talking about debt. For others, it is viewed as a means to an end, a ‘spend money to make money’ type mindset.
My debt mindset
I have to say, I sit in both camps. My opinion varies depending on the type of debt and my situation at the time – yep I’m a fence sitter and don’t believe life is always black and white. I’m not going to discuss every type of debt, or get into a deep ‘good’ versus ‘bad’ debt examination, however I believe there are types of debt that can help you reach important life goals that aren’t necessarily linked purely to finances. Case in point, my HECS debt.
What is a HECS/HELP Debt?
For those of you reading this from outside Australia, HECS (now called HELP – Higher Education Loan Payment) is a government funded scheme to assist university students to pay tuition fees. The government will pay for the cost of the course (you still need to front up for books and other required resources) and then you pay back the debt as a percentage of your wage once you earn over a certain threshold – currently $54,869 per annum – scaled from 4% up to a maximum of 8% per annum. This loan bears no interest charges, however is ‘indexed’ at the rate of inflation each year on 1 July, in 2015 the rate was 2.1% and in 2016 it was 1.5%.
It wasn’t just about the money
From a young age I knew I wanted to attend university and use my degree to kickstart my career. Without the HECS option at the time when I was finishing high school and applying to go to university, I would have had a hard time finding the money to pay for the fees, and probably wouldn’t have enrolled at all.
Some people hate debt and just sleep better at night and feel psychologically good when they don’t have any. For me, I am okay with knowing that this debt has allowed me to reach an even greater level of personal achievement. It means I was able to be the first in my family to complete university, and has also opened up many more doors for me than not having a degree would in my field of work. It was a gateway to a better life, and while it certainly hasn’t made me rich, it has certainly helped put me on the right path getting me where I am today.
Can’t you afford to pay it off now?
Debt and money can be a very emotional topic for many; however I choose to look at this particular debt in a rational and logical way. No I’m not a robot – and there are some other funny money habits I have and will continue to explain in other posts; however this just makes sense to me as being the most practical financial choice.
I could put all of my extra money into paying off this debt faster by adding extra repayments above the minimum that come out of my salary; it might ‘feel’ good for a while, but what happens if I lose my job, or cannot work for an extended period due to illness? All of my money would have gone to the government, and they certainly aren’t going to give it back to me, and banks won’t ever lend at such attractive rates!
I am not saying I will never pay off this debt – which I could do if I never earned above the threshold amount. I am ambitious and highly motivated, which is why I got the loan to complete a degree in the first place, and I believe in paying back what is owed no matter what. The main factor that seals my view is that this loan has no interest and is only indexed at a very low rate, so my money can be better utilised elsewhere such as my ‘stash’ account – my emergency savings that currently yield 3% interest per annum and provide a high level of peace of mind, or the stock market, which for my portfolio has grown by over 11% in in the past 12 months. I could have this debt paid off already however I would be missing out on these even greater financial (wealth building) and psychological (peace of mind) benefits.
Are you promoting debt?
No! While not all debt is necessarily a bad thing, it all depends on what the debt is for and what repayment terms are, especially the interest you will pay. I do not support ongoing credit card debt, personal loan debt to pay for things such as holidays, new cars or daily expenses. If this is your situation it makes mathematical sense to pay off the debt with the highest interest first and then move on to your next highest interest debt, and so on. Or, as science has proven you may be more motivated if you can see a small debt being paid off entirely and choose to pay off the smallest dollar amount first and move down to the next smallest etc. (often call the domino strategy). If you have debts such as these, I would always advocate strongly that you pay them off as quickly as you can so they aren’t holding you back from reaching financial freedom.
Paying off Debt – Final Thoughts
Debt is a funny thing and your relationship with it and how you manage your money will likely differ from how I manage mine, but the overall objective in writing this post is to highlight that not all debt is bad and as long as you understand why you have made a financial decision and are happy with it, try not to get caught up in the comparison game, or let too many people tell you how to manage your money your life.
What is your view on debt? Do you struggle justifying your stance to others? I’d like to discussion in the comments, however encourage positive and thought provoking ideas. If you advocate pay down debt at all costs NOW! I’m happy to hear from you too in a respectful way.