Everyday money

The reason Australians have more personal debt than ever

Aug 28, 2017

Experts say our obsession with real estate has seen the country plummet into debt.

As many of us know, there are different types of debt – some can be classified as “good” like a house purchase and some can be classified as “bad” like that red sports car you don’t actually need.

However, it seems Australians are carrying more personal debt than every before with much of it stemming from our obsession with snapping up real estate.

ABC’s Four Corners recently reported that Australia holds the “dubious” position of having the second highest level of household debt in the world and that for every one dollar earned, we’ve got two dollars of debt.

Of course this isn’t true for all of us, but it seems the forces driving our debt-fuelled housing boom is posing a huge risk for the entire nation.

Especially when you consider that if there is an increase in interest rates or a change in personal circumstance, many of us who are home owners or property investors will be unable to cope.

While industry regulators have increased pressure on lending requirements, it may be too late.

“According to AMP research, the money people owe, in comparison to the money they earn has almost tripled in Australia over the last two decades, with the average household debt currently sitting around $245,000,” says Darren James, financial advisor for AMP.

“Looking at credit card debt alone, the average cardholder owes around $4,300 and is paying about $700 in interest annually. That’s more than $32 billion worth of credit card debt and over $5 billion in interest owed nationwide.”

James warns that Australia is currently in a significant period of economic uncertainty.

“We need to ensure we’re helping consumers manage their way through this period and their debt,” he says.

“We need to help them achieve their financial goals without having to live off credit cards until payday or sink deeper into debt. This would not only be catastrophic for their financial welfare but will also negatively impact the Australian economy, due to decreased consumer spending.”

He suggested the following tips to help achieve financial freedom:

1. Budget, budget, budget

In the current environment, reviewing your household budget is a must-do. It’s a great way to ensure you are living within your means rather than relying on debt to maintain your lifestyle.

The best way to do this is to split your account into three, setting aside money for bills, savings and spending money.

2. Shop around for the best deal

It’s important to shop around for major expenses. When your car or home and contents cover falls due for instance, don’t just pay the premium. Take a look and see if you could do better elsewhere.

Power bills are one area where many of us are feeling the financial heat, with over 82 per cent of Australians concerned about the current costs. Switching energy providers can provide savings. Although the sheer volume of comparison sites like GoSwitch or Energy Made Easy don’t always make it easy to know which provider offers the best deal, by looking back over previous power bills you should be able to form a reasonable picture of your usage patterns. Use this to narrow down the plan best suited to your needs and budget.

There’s also a number of household items that can help reduce your bills over the long term. Check out these six things that could provide you with financial benefits over the long term.

3. Don’t overlook financial products but don’t take on more debt

Fortunately, low wages growth is coinciding with historically low home loan interest rates. But credit card rates can still exceed 20 per cent, and on the average card debt of $3,100 you could be paying interest of more than $600 annually. Yet this cost can potentially be halved by switching to a lower rate card.

A balance transfer deal can help to knock off card debt if you knuckle down to pay off the balance during the zero or low interest period. The catch is that high rates can apply to new purchases, so the success of a balance transfer can hinge on sticking with your budget rather than relying on cards to pay for everyday expenses.

In fact, in today’s environment of low wage growth it can pay to be careful about taking on more debt. A rise in interest rates could leave you financially skewered. Paying with cash where possible has far less impact on our financial wellbeing, especially when it’s part of a sensible budget.