By understanding the types of debt and how best to handle different debt scenarios, you can alleviate stress and work towards your financial goals while effectively managing repayment obligations. This Wealth With Sophia column shares how
When it comes to managing our money, there is one word that triggers anxiety, fear and stress: debt. We get it—managing debt can be a daunting task, especially when we consider the various types of debt that can accumulate over time.
Women also struggle with debt disproportionately: women on average show 30 percent overall greater debt stress scores than men, which impacts job performance, family life and health.
The reality of life is that having debt is often a fundamental factor in an individual and their family's journey. This can start with first loans, such as a student loan to finance university education, and subsequent loans can include, for example, a mortgage to get on the property ladder to start building a property and investment portfolio. However, it's important to stay on top of any financial obligations and avoid falling into a cycle of debt.
So, how can we understand and approach debt in a healthier way? Here, we look at the different types of debt, address some key considerations and share some best practices to manage debt as well as communication tips on how to tackle the topic of debt with a partner.
Debt 101
From credit cards to property loans and car loans, these are some key considerations when considering debt:
- Only borrow what you can afford to pay back
This includes monthly repayment requirements and any late fees or charges if you were to miss a payment. - Research, research, research
Research and understand interest rates that suit your needs best, especially in a rising interest rate environment. - Plan for uncertainty
Understand the different scenarios to manage the debt (whether it’s credit cards, student loans or a mortgage) especially if interest rates or your financial position changes. - For a mortgage, cost management is key
Understand all the costs involved with maintenance and ensure you can afford them. For property, this can include housing repairs, garden repairs, government rates, utility bills. For cars, this can include items such as insurance, fuel, maintenance, parking fees, and other related expenses. - For credit cards, simplification is key
Minimise the number of credit cards you have as it's difficult to manage multiple payment dates and it's often hard to track the amount being spent.
Overall, try to keep an eye on your spending to ensure it doesn’t spiral out of control and fuel your anxiety around managing debt.
Common debt myths
It’s important to debunk some of the most common myths about debt management.
“Good” vs “Bad” debt
One prevalent myth about debt management is the distinction between "good" debt—debt that helps you with your financial future—and "bad" debt—debt that can hurt your financial and personal situation. In reality, all debt should be approached with caution, and it's important to evaluate the potential risks and benefits of taking on any form of debt. Debt should not be seen as inherently good or bad, but rather as a financial responsibility that requires careful consideration and understanding of your current and future abilities to afford debt.
Investing is not only for the debt-free
Another myth when it comes to debt is that you can’t start investing until your debts are fully paid off. Being able to put aside cash to service your debt as well as to invest is a good way to manage your financial life. The key is understanding what interest you are paying on servicing your debt, and comparing that with what you could earn by investing to decide the best option to proceed with. The main caveat is that if you do have high-interest debt to cover, it’s probably better to pay this off first before you start investing.