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096: Managing debt with Alpha Schulte
3.2k Plays8 months ago
In this episode, Mia and Dinah take Alpha Schulte, money coach and ex-tax accountant, on a deep dive into good and bad debt, credit scores, credit cards and loans, how to prioritise what debt to pay off first, and the help available if you have unmanageable debt.
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Transcript
Podcast Introduction
00:00:00
Speaker
This is Life Admin Life Hacks, a podcast that gives you techniques, tips, and tools to tackle your life admin more efficiently, to save your time, your money, and improve your household harmony. I'm Diana Roberts, an operations manager and spreadsheet lover that maintains a spreadsheet each month, keeping track of my assets and debts.
00:00:21
Speaker
I'm Mia Northrop, a researcher and writer. I used to neglect money because it was boring and confusing, and then did a 180 in the quest for prosperity.
Understanding Credit Scores and Debt Types
00:00:30
Speaker
In this episode, we interview Alfa Short, who revealed how you can find out your credit score and what influences it, the different types of debt and their pros and cons, and which debt you want to pay off first. Hello and welcome to Life Admin Life Hacks.
00:00:46
Speaker
So we've done several money episodes to help you manage your personal finances, save more and build wealth. And this is a really important part of life admin because we all need financial security and most of us want prosperity. We want to be comfortable yet. We've never had net focus on debt.
00:01:02
Speaker
No, and most of us are carrying debt either. Student debt, credit card debt, home loans, buy now pay later. In fact, 75% of Australians have some level of debt. And the average household debt was more than $250,000 in 2022, according to the Australian Bureau of Statistics.
00:01:22
Speaker
In fact, Australia has one of the highest levels of household debt in the world, according to the OECD. We're in the top three. I'm not sure that's something to be proud of, but also along with Norway and Switzerland, which is really fascinating. I was really surprised to see that. It's always nice to be amongst some Scandinavians and European countries for some things. But as you said, I don't know if this is a metric that I'm personally proud of.
00:01:44
Speaker
In my average house, I'm way above the household debt. I was like, I don't want to be above average in this metric either.
Australia's Debt Landscape
00:01:51
Speaker
So today we're doing a deep dive into good and bad debt, credit scores, credit cards, various loan types, how to prioritize what debt to pay off first, and the help available if you have unmanageable debt.
00:02:05
Speaker
Alpha Shorter started Money Made Simple to help women understand money, both how to better manage their mindset and the mechanics of money. She now works with small business owners to connect their business and personal finances, with mindset being an essential part. As an ex-tax accountant with over 20 years experience in the finance and consulting industries, Alpha is passionate about helping women build financial confidence and wealth to match the lifestyle they actually want.
00:02:31
Speaker
Alfa, thanks so much for coming on the show today. Thanks, ladies. It's a pleasure
Organizing and Tracking Debts
00:02:35
Speaker
to be here. So to get us started, how can people how can our listeners get a holistic picture of actually how much debt they're in? Yeah, it's an interesting question, actually, because I don't I think a lot of the time we just kind of react or respond to life and we don't really kind of gather everything together in one complete view. I mean, I'm a I love spreadsheets. So I am I tend to have a view in spreadsheets. I
00:02:59
Speaker
I personally, just as a precursor to this, I don't like debt at all. I watched my parents get buried in debt as a kid. I even came home one night and the lights were off because my mum hadn't paid the power bill. Anyway, I grew up in that kind of environment. I was like, oh no, I never want to get into that level of debt. But then we repeat the patterns of past.
00:03:21
Speaker
getting a full picture of it, you kind of just need to write a list. These days, especially, a lot of our bills are electronic, so we don't necessarily get the paper bills anymore. But when a bill does come in, I would say even just create a folder in your inbox and just at least kind of put, once you paid it, put the last bill in there, and then you can kind of get a picture over a month, all of the bills that come in that are debt-related, and then just start to keep a list. And then when you see the balances,
00:03:48
Speaker
And this is the confronting part is to actually write them down so that you can add them all up. Because sometimes you then just go, oh my gosh, I didn't realize that it got to this extent. But if you don't do that, then you don't know where you're going to be moving from because it's important to recognize that this is the starting point. I often do this with clients when we look at net worth and you look at your debts and your assets and all of that. And quite often, they're surprised actually how much better it is than they thought.
00:04:16
Speaker
we often put things off because we are anticipating it to be worse than it is. And it actually might be so we have to sort of be prepared for that. But unless we know we can't do anything about it. So I would say, if you don't want to like physically write a list or keep a spreadsheet, at least put it into a folder in your emails. And then at the end of a month, go through it and look at it and add up the balances and also add up what you're paying in repayments too, because that's going to impact your cash flow.
00:04:40
Speaker
Yeah, I've got a little spreadsheet that I update every month that's called my statement of net worth and I like to do it at the end of every month and check my super balance and like my share portfolio and then where the loan balance is and it's like
00:04:55
Speaker
sad when the months it's gone backwards and then celebrations. And usually the thing is like then at the end of the year to look at, oh, actually the assets minus the debt at the 12 months on, we've actually made progress here. This is feeling good. And that's the thing, we tend to avoid looking at that. And that is brilliant. Like I do quarterly performance reports, but the idea of Excel does actually freak out some of my clients. Like I have one client who if I open my laptop, she's just like switches off. So I have to use pen and paper.
00:05:24
Speaker
But looking at that, so you're actually tracking the progress and you can see how things are getting better. But unless we do that, we only assume the worst. I reckon that's a really great point because I do have a friend who just has, in terms of thinking about where she is at with their finances, she just has one number in her head and that's the mortgage. Is the mortgage going up and down? And it is so much
00:05:50
Speaker
more useful and instructive to float up to that net worth level and look at, okay, well, yes, I've got that debt and I might have credit cards and I might have a car loan or something, but let's also look at the assets. Let's look at what we're using some of that debt for because that one number, that one mortgage figure totally freaks her out. It's such a big number and it's all she focuses on. And then there are more metrics that you really need to stay across.
00:06:16
Speaker
I think, you know, having it like a dashboard, the word spreadsheet might freak people out. The dashboard sounds a lot better. A visceral reaction to it. But a little personal dashboard where you're just tracking a couple of numbers is really great advice. And I used to have it just in the folder where I used to have like my statements in the old world, in a paper world. And I used to just have a piece of paper at the front of that folder where I updated it when I put something new in. So it doesn't have to be electronic. It's just somewhere where you keep tracking. Yeah.
00:06:46
Speaker
Yeah, as long as you know, but yeah, it is important to have that balance look because yeah, we can we can feel and this is where the mindset side really comes in because we can get very defeated when we think about how much we owe, but then we look at how much we own because if someone owes a house, the value of that house has probably increased exponentially or depending where you are, but it will have increased over the last few years.
00:07:10
Speaker
So what you owe is actually good. So it's a good news story because that's gone up. So balancing it out and not just, I mean, our brains are wired for worst case scenario anyway. So if we can try and balance that view out, that that's helpful. Yeah. So you mentioned, you know, when the statements come in, put them aside and start adding them up. And there is a lot of different kinds of personal debt. It comes in very different forms, each with its own characteristics, each with its own interest rates and repayment conditions.
00:07:35
Speaker
Can you walk us through the different types of debt that people often carry? Sorry, it's so easy to get into debt these days because there's just so much out there. So there's, broadly speaking, there's what you have like secured debt and then unsecured debt. So secured debt is classic examples of mortgage. So your debt is actually secured against an asset.
00:07:56
Speaker
and their bank or the financial institution will use that asset if you don't continue your payments. So you have your classic mortgages, you have your personal loans, then you've got your interest-free loans that you get at the Harvey Normans and places like that. Then you've also got store cards, probably not as big a thing anymore. I remember I used to work at David Jones many years ago, and he had the David Jones card. So there's all those sorts of things. There's buy now, pay later,
00:08:22
Speaker
There's so many different kinds of credit facilities that are out there as well. A lot of those ones, they'll be unsecured. You have to pay whatever the amount is, but there's no asset at stake, whereas with a secured debt, your asset at stake is probably a bit dramatic, but it's there secured again. The bank's not going to loan you $500,000 with no security. They're broadly the different types of credit that's out there.
00:08:48
Speaker
And we have a global audience, and I'm very aware that people in the US especially might have medical debt because of the way their health system works, the student loan debt in some countries is just mind blowing. And there's things like overdrafts. Explain to me what overdrafts are. I never got this when I was younger.
00:09:07
Speaker
Yeah, so overdraft, typically, they're more for businesses than individuals. But yeah, that can still happen in an individual space as well. But it's basically where you overdraw your account. I remember my dad was a small business owner, and he basically lived off his overdraft. So you have your, imagine this is like zero, and then this is money in the bank. And then this is the overdraft, which goes below zero.
Good Debt vs Bad Debt
00:09:30
Speaker
And there's an interest rate that goes with that. But there's an agreement that you have with your financial institution that you can go below zero.
00:09:36
Speaker
to a certain limit for a certain period of time, and then you have to pay back. So that's that's it's a it's a convoluted word for basically meaning you're going into negative in your bank account. Yeah. Okay.
00:09:46
Speaker
And then, you know, people classify debt as good debt, okay debt, bad debt, because some debt is actually productive. You know, you said at the start, you're kind of against debt. So I'm curious what you think of these classifications. Let's talk what they are first and then you can tell us your take on that. Yeah. So I'll do what I consider like the classic theoretical kind of concepts between good debt and bad debt.
00:10:08
Speaker
I did actually do a little bit of research because I was curious to see how other people looked at it as well. Dave Ramsey in the US, big finance guy, looks at this quite differently. He doesn't see any good debt. He doesn't like debt at all. He doesn't see any good debt. However, I do think that's a bit linear. Good debt is generally where you go into debt. You borrow money to buy something or invest in something that actually is going to or that intends to make money. For instance, buying an investment property,
00:10:35
Speaker
If your own home, not so much, although you could use the opportunity cost of you don't have to pay rent, and the value of the home will go up and you'll have somewhere to live in retirement. So you can still consider that good debt. But investing in shares, although margin loans is a totally different thing, probably a bit complex maybe for right now.
00:10:55
Speaker
but yet investing in property, investing in something that's going to make money. That's what the classic definition of good debt is. Bad debt is anything that will lose money. And that even includes your car, unless you are a traveling salesperson or a tradie or someone who uses their car as part of their job where they can actually tax-deduct it.
00:11:16
Speaker
the car itself is still not going to make money unless it's, I don't know, like a silver, I don't know, kind of those like a Rolls Royce vintage collected item. Yeah, something that's gonna like maybe grow in value. But that's like a very small percentage of vehicles. But yeah, but bad debt is generally things. And again, with my tax accountant had on as like, cars, they just lose money, you know, you buy the car and you if you're buying a new car, you drive out of the dealership and $10,000 is gone already off the off the price.
00:11:43
Speaker
So that's bad debt and anything else that you buy if you're borrowing money to even putting solar panels on your house. Unless you're doing major improvements that really add value, and even then there's a return on investment that goes with it as well. Over time, I remember we replaced the solar panels on our house and my husband was looking at batteries.
00:12:03
Speaker
And he's like, yes, but it's going to be like a 25 year timeframe before we'd even see that money back. So if you borrow money for things like that, you could still consider it bad debt, but definitely anything that is a luxury in life or something that's not absolutely essential. If you're going to borrow money for it, you would consider that bad debt. Okay. Thanks for spelling that out. Let's talk about credit scores because there are all of these different types of ways of carrying debt.
00:12:28
Speaker
They all have these different conditions related to them. Some are kind of, as you said, good or bad debt. What does that mean for a credit score? What is a credit score?
00:12:36
Speaker
So credit score is a history of your ability to apply, receive and pay back debt. And how it's a little bit like a report card. Think about it when you're at school, like you know how well you do at your tests and you're studying and you're all the different types of assessments. Because like I said, I'm not a fan of debt. But I remember when I was in my teenage years, my dad actually saying to me, now you need to actually get a credit card so that you can get a credit score.
00:13:03
Speaker
I was like, that doesn't even make sense to me. What's that about? I read a lot of financial literature and there was actually recently an article that I read about where it was talking about even just getting like a basic credit card and showing that you can pay it back on a regular basis that adds to your credit score. Not having anything means you don't really have a credit score. It makes it harder for a bank to assess you
00:13:26
Speaker
to see what is your ability to pay. It's a bit like even when you're applying to rent a house, you know, the real estate agent will want a little bit of history to go, Are you a good tenant? You know, going for a job, you have a resume. So a credit card is a credit score is essentially like a resume for debt, to make sure that you actually can do that. Obviously, if you are not paying it back, and you take on more debt, then you can pay and you've got a lot of personal debt, that will start to reduce your credit score.
00:13:51
Speaker
So it can go up and down, but it is very much a money health indicator that financial institutions use. And I think it can also be affected if you get declined for debt. So I think it's something that you don't want to be applying for loans that you're very unlikely to get or applying for a gold credit card that requires you to have, you know, a high income when you actually don't have that income, because I think then you get declined. And I think that's a little black mark against your credit score.
00:14:20
Speaker
Yes, that's the ability to actually get the debt part of it. Yeah, because if you don't, then it shows a certain lack of reality in your own kind of situation. I had a friend recently who applied for some platinum card and he got declined and I was like, okay, that's, and he actually works in the finance industry. I was like, that shit's not really gonna go too well for your credit score. But anyway, but yes, that's right. Being declined is, I wouldn't say it's necessarily worse than missing repayments, but it's certainly not going to increase your score.
00:14:50
Speaker
So it's worth noting that there are different scoring models and different credit reporting systems and agencies in different countries. So often you'll hear about the FICO score, which was the scoring model used in the US. It's different in Australia, but then there are different agencies. So if you, depending on where you live, you can just Google credit score for where you live and it'll suggest some agencies where you can get it. You can usually get one for free.
00:15:12
Speaker
And it'll show you your score and the breakdown of how they came up with that score. I mean, they're all a bit different. The models are all a bit different, but yeah, they look at your payment history. Have you been paying back in a timely way? Have you missed any repayments? They'll look at your credit utilization ratio. That's how much of the credit you're using. So if you have a credit card with a max of 10,000, are you constantly maxing it out and paying off that 10,000? Or are you ideally paying sort of using less than 30% of it
00:15:40
Speaker
bodes well. They'll look at the length of credit history. So that's what you're saying about getting credit card early on and hanging on to it, even if it's just one that you use very rarely, but you're establishing that credit history. They have more data on you basically on your borrowing behavior so they can make their decisions. They also look at the types of credit in use. If you have a mix of different kinds of loans and debt, and obviously if you're applying for lots of new types of loans or cards in a short span,
00:16:10
Speaker
that's going to be flagged as risky and that can, yeah, that can bode poorly for your credit score. And I remember when I was, I don't know, early twenties and I was going to, I was going to Boris and Loni to buy a car, my first car. And I was thinking about whether I needed to take out a loan or whether I'd even qualify for one. And so I just went on a whole bunch of bank websites and through the application process, it would show you the credit, the interest rate they would offer you.
00:16:36
Speaker
But I thought, oh, I have to sort of go through the application process to see the interest rate. And I didn't apply for all of them. I just wanted that. And I actually got a call from one of the banks saying, you know, we saw that you were going through this application. Did you want to go ahead? And I was like, no, I'm just doing some research. And the person was kind enough to say, every time you do that, it's making a hard inquiry to the systems.
00:17:00
Speaker
And pinging, you know, and so now there's all this evidence that you've been pinging to see what credit you can get. Don't do that. Don't do that. Which is great advice. So, yeah, bring your chat with the institution if you need to find out about anything to do with the process or your rates. Don't go willy-nilly putting in applications.
00:17:18
Speaker
to say too, because recently, I mean, obviously, identity theft is a really big thing these days. And credit scores is one way that you can actually because you can actually lock down your credit score. There's a there's an organization called credit savvy. And there's a nut that's about three different credit agencies in Australia. I'm not I'm not familiar with with the US and other countries, but you can actually lock it down so that anytime someone tries to apply for credit, you get notified.
00:17:41
Speaker
So if it's not you and someone else is trying to apply for credit in your name, you can actually become notified if you lock it down. You can only lock it down for like a 12 month period at a time, but then if you go to do it, you can unlock it, but then the other person can't unlock it on your behalf. So that's just another thing to me. That's a good little tip.
00:17:59
Speaker
My ex-husband had the case of identity theft. We got like one of those little postal collection notices, like there's something waiting for you at the post office. And I went into a post office and said, I'm here to collect this. And they're like, your husband already collected this. And I'm like, oh, no, I don't think so. When? And they're like, yesterday, does he look like this? And I'm like, no. And I was like, what was it? And there was a new iPhone. I'm like, oh, we did not buy that. Yeah, it feels like if we had that.
00:18:24
Speaker
Credit lockdown happening and we would have been pinged when someone tried to buy it in his name. Yeah. Yikes. So, Alpha.
00:18:33
Speaker
Let's sort of start to think about some of the mistakes people make when it comes to managing their debt.
Common Debt Mistakes and Budgeting
00:18:38
Speaker
So what are the kind of common mistakes people make in that area? Paying the minimum amount and wanting the debt to actually go down, the minimum, paying the minimum amount isn't actually going to help you pay down your debt. It's just more or less paying like the interest. So if you want to actually get rid of your debt, you have to actually start to pay a bit more than that. So that's one thing. Getting into more debt to pay other debt is another problem as well.
00:19:02
Speaker
So going into like buy now, pay later to pay down a debt and then you're paying, it appears like you're not paying interest to start with, but if you then miss the deadline, then you start paying interest. So I think there's a misnomer that people think buy now, pay later is interest free forever. It's actually not. Yeah. So using buy now, pay later in the first instance and then not making the repayments at all, like actually just not paying. So that's another, that's another problem.
00:19:24
Speaker
going beyond your credit limit on a regular basis, let alone even doing it once, but doing it regularly, because it can become a bit of a habit then when you can't quite get on top of the debt. And then generally, like your first question, having too many loans, so it's really difficult to keep track of. And then there's so many different bills that come in every month, and it does get demoralizing. So they're probably the main ones, really, that I can think of. But it's just, I guess, generally having too much, and it's difficult to track and not paying enough.
00:19:50
Speaker
What's your biggest recommendation for not falling into these kind of traps? I'm going to use the B word, budget. I actually tend to use cash flow management a lot because sometimes the word budget is just a bit too intimidating. But knowing what money is coming in, what money is going out, so having that view makes it a lot easier. At the beginning, you said having a list of all the debts so you actually know what the total balance is and then what you need to pay off.
00:20:18
Speaker
The other thing to try and help it too is I got into this situation. I was in my 20s and you know that whole, I'm never going to be like my parents and then I have all this debt. And it was credit card debt as well. I was like, I can't believe I've done this. I've turned into my mother. I just used one of those zero balance transfers. Do you want to explain what that is for people? Because I'm sure they've seen those promotions.
00:20:37
Speaker
Yeah, and you do have to read the fine print and make sure that it is actually the way it's intended to work. But it was basically, I think I had a store card, I had about five different card debts, because buying a pay later didn't exist back then. And I went to a different credit card company. At that point in time, it was Virgin, and they were offering for six months 0% interest. After that, you just start to pay the normal amount.
00:21:01
Speaker
But I could consolidate all of those five cards and I used this credit card to pay them all off. So I got rid of the five and I ended up with just one debt to pay. And I had six months in order to smash it to get it to zero without paying any interest. So the other five cards all had their high interest rates because most store cards have high interest rate.
00:21:21
Speaker
consolidated all that into one debt, so it was a lot easier to pay. And then I had to just really focused on smashing that within, in my case, the six months, you can go longer, but then you're going to start paying interest. So it does consolidate the debt, but if you want to try and pay as little interest as possible and give banks less money, because they already take enough and all sorts of fees, and that's how you then pay it off in that interest free period. But after that, be aware that there will be interest charged on the balance.
00:21:48
Speaker
And is that what you would advise to pay down credit card debt effectively if you have multiple cards or just a card with a high interest rate to move to a zero balance transfer card? If you can, yes, I would suggest that there's probably two main pathways for credit card debt either to go down that path. If you can't go down that path and you have a home loan, your home loan interest rate will be a lot lower than the card interest rate. So if you can try and consolidate your debts,
00:22:15
Speaker
into the home loan. The key then is to get rid of all those other cards, close the accounts, chop up the cards, which actually sometimes it sounds harder than it actually is. I remember my dad spent two years trying to close a credit card and they kept charging him every month. He's like, I want to close this card and you're charging me the card fee, but I'm trying to close it. I'm not using the card. I haven't used it in two years and it stayed there and it actually took
00:22:37
Speaker
It actually took threatening to go to an ombudsman to get the card closed because this balance had built on it. The two main pathways would be consolidated under a home loan and then get rid of those cards. Consolidated under a zero balance transfer, that would be ideal because then there's no interest being paid on it. Then again, get rid of those cards. Once that one's finished, get rid of it. I realize it's unrealistic to have no cards, no credit cards, but you could get a debit card if you can
00:23:02
Speaker
can manage that way. That's the ideal. Otherwise, just one card with a low credit limit. I had an enthusiastic discussion with a friend the other day who'd gone to some financial seminar and she'd come away saying, everyone should get rid of their credit cards, chop them up, no one should have a credit card. It's the worst thing you can do. I said, you can't have this one size fits all advice. It is great advice if you
00:23:27
Speaker
are regularly going above your limit or not paying off the full amount every month, it can be very convenient to have a car that you do pay off in full every month and get all the benefits of bonus points or frequent filed things or whatever it might be.
00:23:43
Speaker
That's right. What's your take on people's relationships with credit cards and choosing the right product instead of just saying, no, this product, I'm not going anywhere near it? Yeah, I know. It's the extremes. And like you said, there is not one right answer for everybody. I've got one friend and she and her whole family got flights to America last year on the points that she'd earned on her credit card because she
00:24:05
Speaker
think took the credit card up with the home loan and got like, you know, 100,000 points or something like that. So in that case, it actually worked out quite well. So you do have to shop around. Obviously, cards that doesn't charge you too much to have it. And the issue with the rewards programs is you do actually pay to belong to those. And then you the benefit that you get from them is not always fantastic. So I would look at the different reward programs out there. And there are a lot of websites out now that help like Canstar,
00:24:31
Speaker
compare the market, find out, there's quite a few different comparison websites out there that can help put them all side by side. Because if you go on their website, it's convolution, all this stuff has become so complex. It doesn't need to be, but it's the sales tactic. So I would say, I don't personally feel like it's realistic to completely ignore a credit card. I have a credit card, but I pay it off every month. And I get rewards points, I have flybys, I do that kind of thing as well. But I
00:24:59
Speaker
I check every year that the fee stays low and that they're not inflating it too much. It is in individual circumstances, and even though I don't like debt, I do have a credit card. It also comes in handy if you're overseas.
00:25:12
Speaker
And some emergency might come up and you just can't manage in your normal circumstances. I think it's definitely a case of knowing yourself. It's a bit like, are you the kind of person who can have a block of chocolate in the kitchen and sit there quite happily and not eat it? Not me. Like if it's in the kitchen, it's gone. So I just don't have it in the house. But are you the sort of person that if you've got a credit card, you're going to use it irresponsibly. And if you know that about yourself, then just don't give yourself the temptation
00:25:38
Speaker
It was interesting, I just recently added, I've got two teenagers and they don't have credit cards, but they've both got debit cards and recently added their cards to their phones to get like Apple Pay.
00:25:50
Speaker
And all of a sudden the temptation to spend became much higher because I've always got their phone with them. And so I said to my daughter, I think you actually have to get rid of Apple Pay because you just, because it's too convenient for you, you need a little bit of a friction barrier. And she's like, yeah, I guess you're right. Because otherwise every day at the canteen, I'm wasting my money buying a muffin for morning tea. So it's like kind of interesting, know yourself and create an environment that makes it easier for you to live your best life.
00:26:18
Speaker
Yeah, and this is, I'm obsessed with habits, and I read a lot about habits, and we spoke about this Mia, and one of the things that says for the habits that you want to do that are going to be good for you, make them as easy as possible to do. For the habits that you don't, that aren't going to be good for you, like spending, make them as difficult. So put as many obstacles in front of you to those as possible.
00:26:40
Speaker
And this is where understanding your personality, your relationship to debt, the level of impulsivity, whatever happens. For example, I do like clothes and jewelry. So now whenever I have unsubscribed to most of the, I think there's like two databases that I'm still on because I was like, I don't need any clothes. I have more than enough clothes and nice clothes too.
00:27:04
Speaker
that I just I don't want the temptation at all. So just just removed it altogether. But yeah, so you kind of have to put these things in place. But understanding yourself becomes really important and your relationship to money. And also the clarity of what you want money for, because it's really easy to splurge when you don't have a bigger picture. Like people say, Oh, you have to save money. I'm like, Yeah, but what are you saving for?
00:27:24
Speaker
Otherwise, it's like learning a foreign language and you're never going to go to that country. The amount of times I have tried to learn French and I was like, unless I go to France, it's just no motivation to do it. So unless you have a motivation or a goal or a purpose for whether it's your health or money, it just makes it so much harder to stick to it. Yeah, it's a great point. So how do you get people on the journey of identifying what their financial goals
Lifestyle Visioning and Financial Goals
00:27:51
Speaker
are?
00:27:51
Speaker
I like to start with lifestyle visioning, and I know that sounds a bit airy-fairy, but it even comes down to what kind of card you buy, what kind of house do you have? Do you have pets? Do you like to travel? What kind of holidays do you like to go on? And it's a very sort of sensory type of experience where you're like, okay, well, what does it look like? What does it feel like? Because a lot of the time I find people launch into what they think is their dream house to start with, but they haven't necessarily clarified what they want, even down to the fact I had a client who had the most beautiful house in this
00:28:21
Speaker
It was quite an expensive house and a really nice suburb. And she was miserable with the house. And I was like, what's the matter with it? And she's like, I don't have a garden. I really wanted to plant veggies. And I was like, oh, right. And she didn't kind of think of that before buying the house because it was just, oh, we found this. We're just going to go for it. Launch in. And it's understanding ourselves, the kind of life we want. Do you want a quiet life? Do you like the city life?
00:28:44
Speaker
I have one client who's a florist. They had just bought a house and I was like, what do you actually really want? Like, what's the ultimate goal of what would really sort of set your heart on fire? And she's like, I want a farm where I can grow my own flowers and have retreats where people come because she does workshops.
00:28:58
Speaker
And I was like, right, okay, maybe you should start looking for that. And also, but then the other part of it is making sure that your partner's on board with that. Find out what they want. Oh yeah, them too. Yeah, they need to be aligned as well. It's like, so have your dream, but clarify that. So cause then you're in a position to have that conversation with your partner as well. And maybe they can connect to that dream too. And there's an element of that that overlaps with theirs. You never know unless you have that conversation, but quite often we don't allow ourselves the time and space to even think that way. So.
00:29:28
Speaker
Sorry, I get very passionate about that. That's great. I'm sort of thinking of fabulous houses that we're all living in. Let's talk about mortgages because we have had successive months of interest rate hikes in Australia. Much of the world has been the same sort of combat inflation. It's slowly changing, but a lot of us mortgage payments are a lot higher than they were two years ago.
00:29:51
Speaker
What advice do you have for managing mortgage debt? What are the strategies for paying it down? So there are a number, but the more regularly you pay. So most of our repayments are calculated on a monthly basis. If you pay fortnightly, that can actually start. So you can pay the sort of the same amount each month, but you just pay it in a fortnightly basis because the interest rate is calculated on your daily balance. So the more regularly you can reduce that daily balance, the less interest you will pay.
00:30:16
Speaker
I was going to say, that is a really important point for people because often the default payment is monthly. And it is in the best interest of the bank to get you to pay monthly because you're going to be paying more interest. But being able to pay fortnightly and it'd be the same amount. So, you know, whatever your monthly payment is divided by two, in the long run, you'll pay a lot less interest. You can just contact the bank and get your
00:30:41
Speaker
repayment frequency changed, right? Yeah. And I think there's a certain level of cynicism that goes with this, but it's a reality. The banks are there to make money. And the more money they can make, they don't care that you have five children. They don't care that you're supporting your parents. They're literally just about the numbers. So you have to think about yourself and what's best for you. And quite often, we're not given the information to even make that choice. So paying fortnightly
00:31:06
Speaker
Anytime you get any kind of windfalls, like if you get a bonus each year, or you get a tax refund, any kind of extra amount that you receive, if you get a pay rise, maybe if you can, just take the extra, because you've been used to living on that amount, take the extra and put that extra on top of your payments into your mortgage as well. Because it's very easy to get used to a certain amount. It's a bit like a handbag, the bigger it gets, the more stuff you fill in it.
00:31:30
Speaker
So if we've been learning to live, like I remember I probably was at my best financially when I was earning less because I had to be. Whereas the older I've gotten and the more money I've earned, probably the more waste that's kind of come in there as well and more excess. Lifestyle expansion.
00:31:47
Speaker
Yes, the waste exactly. So it's like, oh, I'm trying to get it back down again. And then of course, children come and there's all sorts of expenses that go with that too. So extra payments, shop around for interest rates. You actually can also negotiate with your bank too. A lot of the times we don't realise we can do this and you can do this with insurance providers. You don't have to switch loans because it is actually time consuming. It's a lot of mental load and it's a costly process even to switch loans because there's a loan application fee. There might be an early payout fee for the current loan.
00:32:17
Speaker
So you can actually even negotiate with your existing lender, especially if you shop around and you go, okay, well, these are the terms that are available elsewhere. Can you match them? You know, this, this interest rate here is, you know, it's 1% less, which is significant, but anything less is better. So do the shopping around again with all of those different comparison websites and try and get a lower rate. Yeah, that's great advice. And I think a lot of banks, so because of the monthly hikes that were happening in Australia for the last 12 months.
00:32:45
Speaker
I contacted my bank to talk about interest rates, and they're like, we have a whippage. There's a form. Just fill out the form. And so I went to this form. I put in my current rate. I put in, I think all I had to do was put in the accounts that I wanted them to look at and the current rates. And literally within three days, I got an email back saying, yeah, we've lowered it by point whatever percent.
00:33:07
Speaker
But because they were getting so many inquiries, they just like, okay, fill in the form. We can't actually negotiate with everyone. I don't know how much money I exactly saved, but it was the easiest amount of money I've ever saved because I just filled in a form. It took me five minutes. Cause if you don't ask, you don't know. And the worst that can happen is that they say no. And then you're like, okay, fine. Well, I'm going to start to shop around then. But yeah, and the thing is, is that quite often when you even contact these places, they are pre-authorized to give you a discount. All you have to do is ask.
00:33:34
Speaker
But we don't like to because we're like, oh, okay, I don't think we can. Or is it rude or is it bad?
Managing Mortgage and Negotiating with Banks
00:33:39
Speaker
We just, we don't know. And I think the advice there is that you are unlikely to get that rate reduction if you haven't been paying on time. So like, you know, it's harder for you to get another loan to transfer the loan. They know that if, if that's the case and then they're less likely to give you that rate reduction. So continuing to always make the minimum repayments or
00:34:00
Speaker
I think to contact your bank if you can't. So I don't know whether we want to chat a bit more about that in terms of if you are struggling to meet your debt obligations, like what should you do? Yes, part of it is definitely, so that kind of comes down to your credit history a little bit as well, the healthier it is.
00:34:15
Speaker
And also if you're in, if you've got a lot of equity in your home as well, or the value of your home loan, depending what the value is to the bank, as to how much they're willing to negotiate with you too. And yeah, so there's, there's a lot of variables there, but absolutely, if you're, you know, you've got a good credit score or a late report card, it is, it gives you a more position of power. The other thing too, that I want to point out, because I've seen this happen and it's, it's pretty destructive is the concept of an interest only loan. And this, this kind of links back to your question also Diana about, you know, when people are in financial hardship,
00:34:44
Speaker
there is an option to go into interest only for a period of time. But I've seen that happen where it extends beyond like the six months or the year or the two years. I've seen interest only loans that people have had for 10 years, which means they've paid nothing down on the actual principle of the loan, they've only been paying interest. And that will also impact your ability to negotiate an interest rate if you're only paying an interest only because it shows that you can't pay the principal back.
00:35:07
Speaker
But it's a really, yeah, I would say avoid it at all costs if you can. If you are in real financial hardship and you have no choice for a period of time, perhaps that's an option, but I would caution against it. The other thing you can do is if you have been paying quite well and you find yourself in financial hardship because of the interest rates or job loss or a medical emergency or something else that's happened.
00:35:28
Speaker
you can actually negotiate payment terms with your bank. If you come to them with an option of like, I can do this over a period of time, can we do that? So you can negotiate if you don't want to do it directly with your bank. There is a national debt helpline and there are financial counsellors who can actually help with that as well. So they can do the negotiating on your behalf. And they can also help you to understand what is possible for your circumstances before you actually go to the bank because we're not
00:35:55
Speaker
built to go, because quite often there's shame built around it as well. So it's really hard to even think about it, let alone come up with something that's realistic. There are people who are trained to help and discuss and to help you with the mental side of it as well, because it's
Debt's Impact on Mental Health
00:36:12
Speaker
not pleasant.
00:36:12
Speaker
Yeah, let's talk a little bit about the relationship that we have with debt and how it impacts our identity and the mechanics of debt. So it's one of those things where it comes back a little bit to our level of confidence in ourselves and our ability to manage our own lives. So the money is a big aspect of it. And we often attach our self-worth to the financial side or like what we see in our bank account, the level of debt that we have, which is why we tend to shun looking at it. And if we go back to what we saw in our childhood as well,
00:36:42
Speaker
and how things kind of played out. I come from a migrant background. My grandmother was born at the end of World War I and lived through World War II in Austria, so right in the thick of it. My mum was born right at the end of that and they had to sort of
00:36:58
Speaker
to flee all of that, they ended up coming to Australia in the early 1950s, which was an interesting place to be as a German speaker. If you start to look at levels of trauma that went with that, and if we look at our parentage, you see the cycles repeat quite a lot.
00:37:15
Speaker
So it's acknowledging that that is a cycle and that's family history that does not necessarily reflect your abilities. And even if you take it that way and you've made some mistakes in the past, it's knowing that, okay, they're in the past, I can make choices about what I do in the future, because we're not taught anything about money. We're not taught about so many things to do with how to get in and out of debt and
00:37:37
Speaker
what to do, how to invest, how does superannuation work? I still have clients who are wary of superannuation. I used to be like that. I used to be like, is this really my money? Am I actually going to ever see it? I had that level of distrust. We're not educated in this space. So if you think you plunked in a foreign country and you're like, okay, off you go.
00:37:56
Speaker
you're like, but I don't speak the language. It's the same thing with money. But we associate so much guilt and shame onto ourselves because of that. So I think if people are listening to this podcast, they're interested in learning. And that is the first thing is to know that you're learning and you're on a journey and you're just not there yet. You can go backwards and you progress forwards as well. But I think having that recognition that it's there's no fault necessarily. And the guilt that's there is something that you can work on
00:38:26
Speaker
leaving behind and knowing that you have from here on to make better choices and to understand that it is a journey. If we hold ourselves to the way we used to be, we're just going to keep repeating that cycle. So we've got to draw a line a little bit and go, I need to work on myself. Personal development works well in that space. And understanding who you are will help with that too, because it then allows you to make better decisions that are aligned with who you are and the lifestyle that you want.
00:38:51
Speaker
Sorry, like I said, I get very flowery with this kind of passion. Yeah, this is this is really helpful because it is people can get paralyzed. And there's a lot of self talk that's not very helpful, gets in the way of them taking action and actually, you know, facing into this and you know that action is the antidote to anxiety. So starting to do something and talking to people about it can be the way through what's can be very uncomfortable. So you talked about, you know, if people are struggling with debt, they can talk to financial counselors who can help
00:39:19
Speaker
negotiating your behalf and set up debt repayment plans.
Debt Repayment Strategies
00:39:23
Speaker
For people who aren't necessarily at that extreme scary level of debt, how should they approach what to pay off first, if they have a mix of different credit cards or loans?
00:39:34
Speaker
What do you prioritise? There's probably two different methods in this. There's what they call the snowball method, which your listeners may or may not have heard of, and that's usually taking the biggest debt and focusing on paying that off first. I would ring fence mortgage in that because that would just make it too intimidating, I think, if you focus on that and nothing else.
00:39:53
Speaker
My personal choice is to look at the highest interest rate first, because they're usually also smaller loans as well. They're not as big as a house. If you've got something that's a few thousand dollars, I would say, okay, just smash it, get rid of it, close that card and move on. But I tend to like, if you're going to do a list of your debt, also list out. When I do net worth,
00:40:15
Speaker
with clients, I also get them to list out the interest rate for the debt part of it as well. So you see not only the balance and if there's an asset attached to it, what that value is, but also what the interest rate you're paying. And that way you can start to see the order that you could pay it down in. A lot of store cards are about 25% interest, which is just insane.
00:40:35
Speaker
But then the GLORDA credit cards sit around the 17, 18%. And of course, inflation's impacted them too. Those interest rates have also gone up. So paying that amount of money, that's a lot, especially if you've got, say, a $35,000 car loan, that does a lot of money. Okay, so you might smash out the loans or the cards with the lowest balance on them, because that'll be highly motivating just to see them gone.
00:40:55
Speaker
And then you're moving on to the things that have the high interest rates because that's what's amassing the highest debt. And if some of those you can consolidate into a home loan, which is a lower interest rate, that would be good too. Again, get rid of that and don't do that again. If you need a car, try and save for it.
00:41:14
Speaker
And if you don't have a home loan, are there other kinds of loans you can use to consolidate debt? You can shop around for like personal loans and there are consolidation loans that you can get as well. Again, you'd have to look at what the interest rate is to see if it's actually worthwhile. So if you could get like a personal loan that's 11% and you can consolidate a few different debts that are in like around the 18%, then yes, that's obviously better. Get them all under the one umbrella. So you've got one debt to pay, close all those other accounts and cards and then just stick to that. So that's another option.
00:41:42
Speaker
Okay, and then the other question I hear is, all right, I've got this debt, I want a repayment, but you know, people are also saying that I should have an emergency fund, I should have savings as well going on.
00:41:54
Speaker
Do I just focus on the debt? Do I start to build an emergency fund? How do I face that dilemma? Yeah, that one is a, it's an interesting question. And I have to admit to being a bit torn on that one myself, because I was like, on the one hand, I think everyone should have emergency funds available. Because again, the amount of times I hear stories of, oh, my son broke his arm, and I had to dig into my emergency fund to pay that, or I had to draw down on the home loan to pay that.
00:42:19
Speaker
But at the same time, if you've got an offset account, it feels wrong to have money sitting over here when it could be over there reducing the interest on the home loan. That said, I do think there is value in looking at, especially at the moment, we do have bank accounts that can earn more interest. I think it's necessary to have some money sitting there.
00:42:40
Speaker
that you can draw on if you absolutely need it. The amount you put in there is then the different decision to make. There's often people saying, oh, it's like three months worth of living expenses. I prefer more like six because I feel like that's a little bit more of a safety net because three months just flies. I remember during COVID, my husband lost his job and he didn't find another one for eight months. I mean, obviously, I
00:43:02
Speaker
I owned and we had savings, so it was okay. But if we only had six months worth of living expenses, then we would have been panicking for the last two months. So it really just depends on your own personal circumstances and your own level of risk tolerance. So that's the other thing. We usually think about risk tolerance when it comes to investing, but it also comes into debt too. I had a friend once who, she was just
00:43:25
Speaker
I could tell as soon as we met, she was just so stressed. And it's because she had over a million dollars worth of debt. She's just like, I can't handle it. And the next time I spoke to her, she'd sold a block of land or her and her husband sold a block of land and their debt was down to a much more manageable number for her. So it depends on your current debt levels, on your tolerance for it, your ability to repay what you've got. There's so many variables that go with it. But if you can, I would suggest having money set aside in a high interest earning bank account that you put
00:43:53
Speaker
maybe $100, $200 a month into until you get to a certain limit and have that sitting there just as rainy day. Yeah, it's really good advice. And I think that if you are in a situation where you've got lots of debt and you've got no emergency fund, you potentially go the sort of split strategy, like slowly start to build up your emergency fund and try and repay the debt at the same time so that you're not sort of putting all your eggs into one basket. It's probably something to consider.
00:44:19
Speaker
And it's also good for your mental state of money to say, to prove to yourself, I have the discipline to save. I have a positive relationship with money. It's not just about I earn and I pay debt. I earn and I pay debt. I can actually save. So there is a positive mindset impact to that as well, to demonstrate to yourself that you have the ability to save money as well. And that then makes us feel a bit more confident and do other things
Positive Money Mindset and Opportunities
00:44:42
Speaker
too. Yeah. And in one of your recent podcasts, you talk about raising your money energy.
00:44:47
Speaker
Tell us a bit about that and how it's impacted by debt. And this is where Diana's going to go, Oh my God, it's all this editing stuff. It's like, wow. It's actually, it's linked a little bit to my, to my last answer. Cause debt feels heavy. Like it just, you know, the whole concept of it, you think about, Oh, I've got, like, I still remember when you get the mail and you get the, the enveloped, um, like the envelopes with the windows and you're like, Oh, that's a bill. You know, that's just, there's just this thing. It's not like you go, Yay, I pay a bill. You know, it's not exactly great energy.
00:45:15
Speaker
And even the concept of, as a business owner, paying tax, we're kind of like, oh, we're going to pay tax. But paying tax is actually a really good thing because it means you're earning enough money in order to pay tax. So there's a little bit of a perspective shift that goes with it too. But it's getting to the point where you see money as there is an abundance of it rather than, again, I have had a client who was constantly like, she couldn't go beyond a certain income ceiling.
00:45:40
Speaker
And recognizing that there was a block there, and it does sound a bit sort of woo woo to a certain extent, but there is the way we think and the way we feel about money, how we hold ourselves when we think about it, it impacts what flows around us. So if we think about if we're very sedentary, our bodies don't move, they start to atrophy.
00:46:01
Speaker
So if the same thing goes with the energy around money, if we start to constantly, if we're only thinking about it in terms of, oh, it's hard to earn, there's not enough of it, I never can pay everything, da da da, then it's always just negative. You're never even gonna look for the opportunities to either make more money,
00:46:16
Speaker
or to pay things back or to learn and grow. So it's a very like shrinking, it's that concept, it's a very overused term, but that like growth mindset versus scarcity, it is linked to that. So if we're constantly in scarcity, then everything feels small, everything feels less, even our posture changes. So the energy trying to get to the point where we
00:46:37
Speaker
We can reframe things and we can start to look for opportunities and raise that vibration. Then we can start to go, oh, wow, okay. And then, and I know this sounds really weird, but opportunities come. I remember when I was at university, I must have applied for 50 different jobs because I studied marketing when I first was at uni. I didn't even get an interview for anything. It was just, it was just, it just didn't work. Fast forward 10 years, I was working for a small consulting company. They offered me the marketing manager role.
00:47:05
Speaker
And I just remember going, you have got to be kidding me, because I just focused on doing what I was doing and improving and developing and just and I'd, I'd taken a leap and a risk in my career anyway. And I was just like, I'm just gonna, you know, put everything out there, give it my best and see what happens. And then I get offered this. And I just remember thinking like the irony. And it's, you know, trying to go up the river instead of flowing with it to a certain extent. And that's not so you put up with everything.
00:47:32
Speaker
But you need to become more aware. Anyway, like I said, I can I could go on and on about it. But you probably get my point. Thanks, Alfie. You've given everyone lots to think about in terms of their own thinking and lots of things to plan to do to take action.
Alfa Short's Webinars and Closing Remarks
00:47:46
Speaker
Thank you so much for sharing your experience and your ideas with us today. No worries at all. It's been lovely. Where can our listeners find out more about you? On socials. So on Instagram, it's Alpha Money Made Simple. Facebook, I'm MMS, Money Made Simple, and then my website, which is money-madesimple.com.au.
00:48:04
Speaker
So you can message me or find me on all of there. And I'm on a real money habits thing at the moment. So there's lots of tips coming around and things that I do. And did you want to talk about your monthly webinars? Yes, yes. Because I find it so hard to find like, where do you ask? Who do you ask all of this? So I've started a monthly webinar series. So I'm doing two months of content. And then I do a month of where you just ask me anything in that period. And then I do another two months of content. And then so I've got like three ask me anything's.
00:48:32
Speaker
in relation to Money and Mindset. So you can find that at moneywebinarseries.com. Beautiful. Link to it in the show notes. Thank you so much, Alpha. Thanks, Alpha. Thank you very much. Thanks for listening. Show notes for this episode are available at lifeadminlifehacks.com. And if you're a fan, please subscribe and share the love and tell a friend or review us in your podcasting app. You can also follow us on Facebook, Instagram and LinkedIn.