Know Your Money Personality

Managing Debt:

It's good to be able to borrow money. It can help you acquire assets – like a house, a business or an education. But debt can also be a trap. The interest you pay on debt sucks your money away from you and stops you building your net worth.

Think before you go into debt

Going into debt is a big decision. When you have debt, your life options can become more limited.

Debt comes in many forms – credit cards, HP, mortgages, personal loans… There's no shortage of options for lending money.

Just because you earn enough to meet a loan repayment doesn't mean a loan is your best option.

Don't be sucked in by easy credit

Make an informed decision – don’t let easy credit lead you to spend more than if you were spending from your savings. If you had to take the money out of your savings account to pay for this, would you?

Remember – getting into debt is easy. Getting out of it is much harder.

Do you really need to borrow?

Can I afford it?

Deciding whether you can afford to borrow money to make the purchase involves more than just deciding if you can meet the loan repayments. For example, you may be able to afford to borrow money to buy a car, but have you worked out what it will cost to register, run and maintain? You need to work out the full effect of the purchase on your budget before deciding if it's worth borrowing for.

Borrow to invest in an asset. Save to pay expenses.

Borrow to buy an asset

Assets are good. Once you've paid for them, you have something of value that you could sell if you had to.

There are two kinds of assets – value builders and value losers.

Value builders are assets that are likely to hold their value, grow in value or give you income after you've paid for them. A house is the classic value builder (although houses can lose value). As a rule, if you keep a house for the long term (over ten years) the value will increase or stay about the same. You also save money on rent (although you pay out money on maintenance and rates). And if you needed to, you could sell the house and pay back your debt.

Education which enhances your job prospects (and income earning potential) is a great value builder.

Buying a value building asset is an investment. It's a valid reason to go into debt.

Value losers are assets that lose value after you've paid for them, like a car. Every year you own your car, it is worth less money. Borrowing to buy a car can be a bad move – especially if the car loses value faster than you can pay the debt off.

If you really need to buy a car (or any other value loser) with a loan, think about borrowing only part of the purchase price.

Save to pay expenses

Expenses are things that leave you with nothing after you've paid for them. Living costs, nights out, and holidays are all expenses. Pay for expenses from your income or short-term savings.

It can be painless to pay for a meal in a restaurant on your credit card. But if you take a few months to pay off the credit card, it can be very painful when you realise that interest is making that meal out (which you barely remember by now) more expensive every day the debt isn't paid off.

Remember, saving money to buy things makes the overall cost of those things lower.