debt Managing debt It’s easy to get into, harder to get out. Inside . . . Think before you go into debt Know your borrowing options Pay off debt or save? Get out of debt fast brought to you by the retirement commission debt Think before you go into debt It’s good to be able to borrow Do you need to borrow? 2 Borrow to invest in an asset you need Don’t be sucked in by money. It can help you build up Some assets are good. Once you’ve paid for easy credit assets – like a house, a business or them, you have something of value that you Make an informed decision an education. But debt can also be At Sorted, we have three simple rules could sell if you had to. – don’t let easy credit lead you a trap. The interest you pay on debt about borrowing and saving: to spend more than if you were There are two main types of assets: sucks your money away from you 1 Ask yourself ‘do I really need the spending from your savings. and stops you building your wealth item or service I want to buy – Value builders are assets that are likely to hold If you had to take the money or ‘net worth’. and can I afford it?’ their value, grow in value or give you income out of your savings account after you’ve paid for them. Value builders include to pay for this, would you? Your net worth is what you own, Deciding whether you can afford to houses (although they can lose value) and less what you owe. borrow money involves more than education, which improves your job prospects Going into debt is a big decision. just deciding if you can meet the loan and ability to earn income. When you have debt, your life repayments. Use the Regular Savings Value losers are assets that lose value after options can start to become far For example, you may be able to afford calculator to work out how you’ve paid for them, like a car. Borrowing to buy quickly you could save the more limited. to borrow money to buy a car, but have a car can be a bad move – especially if it loses money so you don’t have Debt comes in many forms – credit you worked out what it will cost to value faster than you can pay the debt off. to borrow it. cards, hire purchase, mortgages, register, run and maintain? If you really need to buy a car (or any other value personal loans. There’s no shortage You need to work out the full effect of loser), think about saving for it, or borrowing only of people out there wanting to lend the purchase on your budget before part of the purchase price. you money. deciding if it’s worth borrowing for. 3 Save to pay for expenses or non-essentials Know the full cost of Remember – getting It can be painless to pay for a meal in a getting into debt into debt is easy. Getting restaurant on your credit card. But if you take Borrowing money has a price – a few months to pay off the card, it can know the full costs before you out of it is much harder. be very painful when you realise that interest get into debt. is making that meal more expensive every day. 1 2 Get your debt debt Pay off debt or save? As a rule, it makes sense to try to pay back Get into the savings habit .... Combine your debts Know your borrowing options your loans as fast as possible before you start saving – particularly if you have high Some people feel more comfortable to save money If you decide you need to borrow, starting a small savings scheme interest debt like hire purchase or credit cards. make sure it costs you as little while they are still paying off a loan Credit cards have higher interest than However, there are some cases when it’s as possible. (such as a mortgage). mortgages – perhaps more than twice as good to do both – pay off debt fast and save Once you’ve decided on your best You’ll get into the habit of saving, much! Think about ‘consolidating’ your debts at the same time. borrowing option, work out how and start to build a small nest onto a lower interest mortgage. Joining KiwiSaver much you can afford to borrow, and egg. You’ll also start to build Try these online calculators how quickly you can pay it back. Even if you have debt, you may be better off your knowledge of savings and .... financially joining the government’s KiwiSaver You need to take into account: investment options, so that you’re retirement savings scheme because of the Thinking of saving rather than borrowing? n How much you want to borrow. better prepared when you want to incentives offered. start serious saving. To find out just how fast you could save the n The interest rate you’re Workplace saving money you need, try out the Goal Machine likely to pay. Some employers offer their own subsidised calculator. Just enter how much you want n How long you’ll be retirement savings schemes. This means that to save and by when, and it does the borrowing for. Use the Get out of calculations for you. for every amount you save, your employer also n How often you’ll make Debt calculator to see contributes some money. You may be better Understand the real cost repayments. the impact a small increase off paying into a scheme like this, as well as in repayments can have. of a loan before you take it on. repaying your mortgage or other loan faster. Use the Get into Debt calculator to KiwiSaver also has employer contributions. Find out about your rights calculate the total interest you’ll pay by Saving for an emergency fund the time you pay off a loan. as a borrower, the different ways to borrow and how It’s common sense to have an amount of much each option costs. money (say two or three months’ income) www.consumer.org.nz you can call on if the unexpected happens. It means you won’t have to borrow money or be left financially vulnerable. Saving for an emergency fund may not be such a good option if you’ve got high interest debt. 3 4 Get your debt debt Get out of debt fast Kiwi story The longer you have debt that charges interest, Compound interest applies You can’t do without your sleep… the more you pay. to borrowing too So it’s a good idea to: Just as you get compound Trudy is 28, single, and working in an about her money situation that she interest on savings, you pay office. She’s earning a good salary, and isn’t sleeping at night. n Get rid of your high-interest debt first compound interest on the she loves buying beautiful things. Over (such as credit cards and hire purchase). Trudy visits www.sorted.org.nz and money you borrow. the past couple of years she has built realises that her biggest concern should n See if you can increase your loan repayments up quite a bit of debt, and she’s got be improving her net worth – the to clear your other debt faster – but check absolutely no savings. Her credit card difference between what she owns and with your lender that this won’t result in balance is $3,000 and she owes $1,200 penalty payments. Paying off your what she owes. So she decides to take on HP. a long-term view and stay focused on Then get saving! mortgage as fast as It’s high interest debt so she’s been getting rid of her debt. you can is a great making a concerted effort to pay it off. She sets a goal to pay off her credit .... Get out of Debt calculator financial decision. But with no savings Trudy is concerned card and HP balance in six months. about not having anything put aside After that, she will start saving for the The Get out of Debt calculator will help you for emergencies (like her car breaking emergency fund. to work out how to get rid of your debt faster. down!). In fact she is worrying so much Just enter the relevant figures and you’ll see how long it will take you to pay off each of your existing debts, and the interest you’ll pay. You’ll also see what happens if you increase your repayments. 5 6 Get your debt Where to now? 1 Borrowing only what you need? 2 Know the true cost of your debt? 3 Paying off your debt fast (high interest first)? Next step: e.g. use Sorted’s Get out of Debt calculator.