Two things relating to money shocked me this week, one pleasantly, the other not so.

I discovered on Wednesday morning that a colleague who’s on contract had been informed the afternoon prior that her contract was not being renewed. She was quite distressed at the thought of having no more income in only a fortnight’s time. Listening to her story I was stunned when she said to me that, as she had just signed a lease on a rental property as well as a loan for a car, she’d have to go bankrupt. I told her immediately that was not a good idea, neither was contacting one of those companies that promise to roll all your debt repayments into “one easy monthly payment”, because of the excessive fees they charge.

I then showed her the list of lenders’ phone numbers for people in financial hardship on our website. These numbers are the ones you need to call straight away if you find yourself in difficulty. If you wait until you’ve missed a loan repayment before you make a call to the general enquiries number at your lender you won’t get a sympathetic ear. You really need to speak to the staff on those hardship lines who are trained to deal with people in trouble, rather than the random employee you get on a general line.

One call later and my colleague’s lender had given her a six month repayment holiday. Six months! Well done Westpac, seems you have a heart after all, albeit one you need to know how to find.

The second thing to surprise me was a moneybox I saw today in the window of our local chemist. Shaped like a poker machine, this moneybox is a coin-operated game that does nothing to discourage children from thinking that playing the pokies is a normal thing. If you’re after a responsible moneybox that actually teaches your kids to put money aside for charity as well as for things they want to buy, the Moonjar Moneybox is a ripper.

We have done it again. After starting a mortgage when we moved from a townhouse to a freestanding house just under three years ago, Claudia and I are once again debt free.

Unlike the other three, paying off this fourth mortgage feels particularly special. Claudia and I have managed to pay this mortgage off while simultaneously having two children, paying for daycare, renovating and with Claudia completing full time study. And for most of that time on one, slightly above average wage.

As this time we own the roof over the heads of the two most precious people we will ever know, the feeling of security and achievement is enhanced. The worry and stress of having a mortgage is gone, allowing us to be able to focus on other much more important things associated with our family.

If you’re reading this and thinking to yourself “How the hell did they do it?” I recommend you read over the course on our website. I first wrote Financial Freedom For Gens X and Y 10 years ago, putting the course online in 2010. I wrote it not as a way to make a few extra bucks (our website is totally free and, unlike others, contains no advertising) but to get the message out about how much easier life is with your finances sorted.

Essentially, I wrote the course for you.

Every now and then you come across something genuine and without an agenda, something that can help you enormously. All it requires is for you to take advantage of the information we have and start experiencing what a debt free life feels like.

A couple of months back the way credit records are looked at changed. It used to be that only negative information was stored by the credit file companies, that is info which showed when you were late with or defaulted on a payment. The positive stuff, where make your loan repayments on time month after month, was ignored up until March this year. It’s good news for those who have been diligent with their credit.

Another change that’s come about recently is to do with credit scores. Previously these numbers were only really known to banks and other lenders, but now you can find out your own score online. Punch your details into getcreditscore.com.au and a minute later you will be given a number between 0 and 1,200. The higher your number is the more creditworthy you are, or so the theory goes.

I scored below 1,000 which is a bit confusing given I’ve never been late with a payment and promptly paid off any debts I’ve had. So, as with anything you get over the net in 60 seconds for free, take it with a grain of salt.

The short answer: more information than there used to be. Like it or not, there is a record kept dating back several years, accessible by companies who need to see it, that shows your credit history.

Ever applied for a car loan, credit card, business loan, mortgage, hire purchase or investment loan? (Note that sentence reads “applied for” not “do you have”.) What about a utility bill – has your name appeared on a statement for gas, electricity, internet or for a mobile phone? If your answer is yes, you have a credit record.

Credit records are used by companies like banks to see how risky you are when it comes to repaying a loan, and businesses like telcos to indicate if you are likely to pay your bills on time. They’ve been around for years and include info such as how many times you have applied for credit, when you were given credit and when you have been late in paying. Your credit record will also show details of bankruptcy.

It used to be that this was pretty much all the stuff that was on your credit file, and the black marks would only appear if you were about 60 days overdue on your bills. But now that’s changed.

As soon as you are one day late on a bill, that information can now be recorded on your credit file. It’s bloody harsh and means that unless you have automatic payment plans set up for all your bills, you really need to be on top of things to ensure your credit file remains looking good.

If you don’t know what your credit file contains it is a good idea to get a hold of a copy of it. There’s two ways to go about it – the quick way (yeah, it’ll cost you) and the slow way, which, if you can wait a week or two for it, will be free.

Contact Veda Advantage, Dun and Bradstreet or the Tasmanian Collection Service (there are direct links to the forms you need for these guys under the Debt Elimination topic) and get them to send you a copy of your file. If you find something there you have forgotten about or something that shouldn’t be there at all, you will have every chance to sort it. That’s particularly important to do before you go cap in hand to your bank for your next loan.

I walked into a Westpac branch recently and noticed a brochure for a new product – the Westpac Flexi Loan. This is a “convenient” product that will help you “start afresh in 2013” if you believe the bold print. As with any bank issued information there is fine print on the back of the brochure, right down the bottom, which makes for interesting reading.

A Flexi Loan is like a combination of a line of credit, personal loan and credit card. Effectively, it’s a personal loan that you have a pre-determined credit limit on, between $4,000 and $75,000. Like a line of credit you may redraw up to the amount of your approved limit, without reapplying. Like a personal loan, the Flexi Loan can be for one, two, three, four or five years. Like a credit card, the minimum repayment is equal to 2% of the unpaid balance (or $10 – whichever is greater), plus any unpaid amounts and any amount that exceeds your credit limit. (I have always wondered how it’s possible to exceed a credit limit, especially as just about all exchanges of money these days involves using a card (credit card purchases, debit card ATM withdrawals, withdrawing cash over the counter at a bank after swiping your relevant bank issued card, etc) and that any attempt to withdraw/purchase over your available amount should simply be disallowed by the card issuer.)

Upon application you’ll be encouraged to get a loan with a higher credit limit than you need, just in case you need it in the future. You’ll pay an establishment fee of $150, plus $10 per month at a variable rate of, currently, an incredibly high 14.69%.

Reading the Flexi Loan brochure was the first time I’ve come across this type of loan but I dare say it won’t be the last. It’s something that has the potential for decent bank profits, regardless of whether or not it’s in the best interests of consumers.

As this product is a combination of a credit card and a line of credit, it’s the sort of loan that I reckon should only be used by people who really know what they’re doing. People who are really good with their dough.

Ironically this means that it’s really best suited for people who don’t need a personal loan.

Some years ago there seemed to be a change in the collective mindset of the Australian community. Suddenly we went from a country where it was totally acceptable to do whatever job you wanted to one where you “needed” to have a university degree. Not that you actually do need a degree, just that there is an expectation that a bunch of jobs that didn’t previously require tertiary qualifications now need the applicant to hold a piece of paper.

So these days there are huge numbers of people who feel stuck in careers they feel obliged to do because of the time and money that went into the study that led to the job. And there are just as large a number of people who are starting their careers with a pile of tertiary education debt. At least they should be earning enough to see it slowly chipped away.

For stay at home mums and dads, earning enough to pay off a Fee HELP debt (or HECS, as it used to be known) is something that seems light years away. In the meantime, this interest free debt keeps growing.

How does interest free debt grow? It’s because HELP debt increases each year in line with inflation (which is currently running at about 1.6%). Yes, that is a very small percent to be paying on a debt, but if the debt doesn’t get reduced it will compound – it gets progressively bigger for every year it sits there. Five or 10 years out of the workforce, or earning under the repayment threshold, could see a substantial amount accumulate, especially if you did post graduate studies that added to your undergraduate HELP bill.

For the current financial year, anyone earning under $49,096 will not be required to pay back any of their HELP debt. That means if you never earn an average or just below average wage, you will never need to pay it back (unless legislation changes). Once your income hits $49,096, four percent is taken out to go towards the loan, rising to as much as 8% of your income if you earn over $91,178.

If you have a HELP debt and you hate the thought of owing anybody any money at all, the big question is this – should I pay it off? If you have the spare cash or a windfall that will cover the amount, voluntary repayments of at least $500 will get you a 5% discount. So for every $500 you pay back, $525 is credited. Yes, it’s bugger all incentive to get cracking on this loan. Years ago when the incentive was 10% I used to tell people to consider it, now I tell people not to bother. If you are thinking of making a repayment of less than $500 it’s pretty much a waste of time. The best thing about the HELP debt that’s been coming out of your wage being gone is that you get an effective tax free pay rise of between 4-8%.

And of course, all of the above assumes that the only university debt you ended up with was provided by the government. All that credit card, personal loan, car loan and other debt you racked up just to get by, that’s another story altogether.

I received some junk mail the other day (sorry, unaddressed advertising material, I’d hate to offend anyone) from GE Money. They were selling a glossy, happy, brightly decorated lifestyle change under the guise of a debt consolidation loan. Using terms like “surprisingly affordable”, “life could be a lot easier if you rolled all your debt into a GE Money Debt Consolidation Loan”, “fits your lifestyle” and “enjoy the certainty of fixed repayments” you could be forgiven for thinking these guys were a charity (debt consolidation loans of $2 and more are very rarely tax deductable).

Before you consider rolling all your credit card, car loan and personal loan debts into a debt consolidation loan, please make sure you read the fine print. For a full list of all the conditions you would need to go through the loan paperwork, but the info on the back of the junk mail pamphlet gives you some insight. Using their figures (but not their online inflexible loan calculator, I had to visit a reputable site to crunch the numbers) the minimum loan amount of $3,000 paid off over the maximum 5 years would cost over $1,280 in interest and $850 in fees. So your initial 3 grand loan ends up costing you over $5,130. That’s a lot of money and an awful lot of fees, particularly when one of the selling points they use relates to avoiding multiple fees as a benefit of taking on one of their loans.

GE Money says – “You’ll be surprised how little it could cost you each week!” which, when you read the figures above is another way of saying “You’ll be shocked how much debt consolidation costs you over the life of the loan.”

The interest rate is fixed at a massive 14.99% so you can “enjoy the stability of a fixed interest rate”, but I don’t think you would enjoy it much when you see the Reserve Bank lower official rates.

So if you have looked at consolidating your debts and are now sitting there scratching your head, what is the best thing to do? Start by making extra repayments onto your highest interest rate debt. Pay every spare cent that you have into this loan while making the minimum repayment on all your other loans. When the highest rate debt is paid off, put the money that was going onto it into paying off your second highest interest rate debt (as well as the minimum payment that you had already been making on debt number 2). Keep going until all the debts have been extinguished, then chuck a party to celebrate (nothing too big, you don’t want to end up in debt again!)

If you really knuckle down and make a huge effort to get rid of your debts, you will notice a couple of things. Firstly, the hardest part is the first extra repayment on that first loan. Every subsequent debt will be paid off with increasing speed, probably a lot faster than you thought possible and certainly a lot faster than with a debt consolidation loan. The amount of money you pay in interest gets smaller and smaller, and as time goes on your confidence with your financial situation grows.

And you end up realising just how crazy those debt consolidation loans really are.

We’ve finished! Regular readers would know that Claudia and I have been renovating lately, including painting the interior of the house, but the brushes have fallen silent because we have finished painting. We spent a bloody long time doing it and learnt a lot along the way. All that time spent staring at the ceiling and walls sent me a little mad, but it did make me think how similar painting your house is to paying off a mortgage.

Sure, there are heaps of differences between painting a house and paying it off, like the fact you can’t pay a house off in 2 months and, try as you might, you normally can’t get someone else to do the job for you. But the similarities are worth exploring.

Firstly, if you’re renting, it’s somebody else’s problem. It may well end up being something you tackle later, but for the time being it’s not your top priority.

Before you start on your endeavor there is a part of you that says “This can’t be too hard, heaps of people do this”, and another part of you that can see the enormity of the task ahead. Every stroke of the brush is the equivalent of another dollar paid towards the mortgage. Fair dinkum, there would have to be many tens of thousands of brush strokes in the job we’ve just done.

To really get stuck into it you have to wear old tatty clothes, you say to yourself how much easier it would be without kids, and dream about it at night. You lose the motivation to comb your hair on the weekends, and, as you’re not going out anywhere special, it doesn’t really matter anyway.

Doing it by yourself is a tough slog. Yeah it’s possible, but any help you can get will speed things up. Two people working together are twice as productive and family often contribute towards a room or two.

It seems to take forever before you can actually start to see some progress. Ages of fixing holes, sanding, sugarsoaping and taping is the equivalent of the early repayments when you can hardly notice a dent in the loan. Getting to the point of using a roller is like a bonus of money – that pay rise, the tax refund you were counting on, an inheritance, or winning the lucrative contract – large amounts of the task get done in seemingly record time and it gives you real encouragement to keep going.

There are always things that crop up to slow you down – illness, unexpected repairs, a whoops pregnancy and concentrating your efforts on other things.

The final stages flash by as you are able to look back at all you’ve achieved and can imagine what it will be like when it’s done. When you finally reach that end point it’s a bloody fantastic feeling, made all the better by celebrating (but not with champagne ‘cause the last thing you want to do is risk the cork dinting the pristine ceiling).

And when you look back on it there is a stupid, stupid part of you that says “That wasn’t so bad, we can do that again one day….”

With apologies to those who believe in reincarnation, it’s true that you only have one crack at life and implicit in this is that you should live for today. The problem with that is it can lead to a life with unnecessary hardship down the track. The ‘only live once’ approach should perhaps be replaced with a ‘no regrets’ approach. Although on the surface they are similar, the no regrets attitude looks towards the future.

I have heard many a young person justify the personal debt they are in with the line “Well, you only live once!” and I have heard just as many people a few years older express regret at the debt they burdened themselves with when they were younger. So to minimise the chance of regret, I reckon you should think to yourself “You only need to do it tough once.” You get to choose if you will do it tough for a short time by saving up for purchases, or a long time by buying on credit then paying your debts off.

The ‘do it tough once’ thing assumes that you don’t suffer some sort of personal tragedy, illness or disability that you can’t insure yourself against or avoid. Statistics tell us that there is a pretty high chance that you will bit hit with an affliction that’ll lay you off work for a couple of months at some stage in your life. So I guess the reality is that you may have to do it tough twice.

I’m not saying that all the good things you want should be delayed until you no longer have enough teeth to chew your own steak. There is a happy medium between living for today, at a big cost, and not spending a cent ‘til the day you retire. In fact, doing things tough when you’re young means there is little risk of having a retirement where you have to rely on government help.

Doing things tough once also lowers the chances of passing on the burden of debt to your family when you depart. Personally I can think of nothing where I would be more of a failure as a parent than to pass on a large debt with nothing to show for it to my children. Giving my kids the best crack at life has always been a very high priority for me, and being free of debt is a big part of that.

So next time you are tempted to whack that new lounge on credit or buy that car with a loan, think about how much easier life will be later on if you delay the purchase and use your savings instead.

There are a lot of people in finance who like to talk about good debt and bad debt, as though debt could either be well behaved or dig lots of holes in your garden. Perhaps debt should be referred to as naughty or nice. I guess in the simplest forms you could categorise them like that, but life’s not that simple so I prefer to refer to debt in a different, more complex way.

Debt is either tax deductible or its not, and debt is used to buy something that will either rise or fall in value.

While you are still awake I’ll tell you about tax deductible debt; it’s anything that can be included in your personal or business tax return (yes, you might need to grab yourself a coffee at this point). The majority of taxpayers would not be able to claim a tax deduction on their credit card or personal loan interest, because the purchase that’s accruing interest hasn’t been for something that earns income. If you use your car for work (that’s at work, not driving to and from the office) and your car has a loan, you will be able to claim a bit of the interest on that loan. Tax deductible debts are also the loans used to purchase investments like shares and property (but not vacant blocks of land). Because the tax deduction allows you to effectively lower the interest you pay, there is not the same urgency to pay off these loans. Thus the ‘good’ debt. [As a side, I’ve never heard from a victim of a rogue geared investment scheme referring to the debt that crippled them as being good in any way.]

When you have purchased something with debt that you can’t claim on your tax (pair of jeans, Blu-ray recorder, cat food, snowboard, etc.) then you want to pay this off as soon as you can. This debt is usually for stuff that falls in value (the coffee you have just finished won’t be worth too much now, and the cat food’s only worth something if it’s been half eaten by Paris Hilton’s dog, you can prove it, and successfully sell it to some idiot on eBay). Bad debt. Naughty debt. Go and sit in the corner.

Things in the non-tax deductible debt category that go up in value are usually only homes (mortgages) and qualifications (FEE HELP). They might not always rise in value but they should be worth more as the years go by. Sort of, kinda, alright good debt. Good because it’s not bad, but I’d never refer to a half million dollar mortgage as good. These debts should still be paid off quickly, but there’s no need to pay off FEE HELP or HECS debt quickly.

Like I said, it’s complicated.

To make it easy to remember, get rid of all the debt that you can’t claim on your tax, especially if the debt was used to buy things that aren’t worth as much anymore. After they’re gone then you can concentrate on paying off that geared share portfolio and investment property.