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Debt outstrips income growth

Date: Mar 21st, 2016

Household debt has grown by 5.3% above the rate of inflation, leaving our income growth rate of 1.3% trailing in its wake.

The decision last week by the Reserve Bank to keep the official cash rate on hold is good news. Sure, those of us with a home loan would have preferred a rate cut, but it’s certainly way more welcome than a rate rise – especially as our household debt levels are soaring.

A recent report from AMP and University of Canberra-based think tank NATSEM, shows Australian households currently owe an average of $245,000 – four times the average household debt of $60,000 in 1989.

It means that in less than three decades, we have quadrupled our debt burden.

Putting this growth in perspective, the report – tellingly entitled ‘ Buy now, pay later’, points out that household debt has grown by 5.3% above the rate of inflation, leaving our income growth rate of 1.3% trailing in its wake.

Looked at differently, in the late 1980s the average household could have paid off all its debt with the after-tax income it earned in eight months. These days it would take around 22 months.

Rising house prices and low interest rates have fueled our willingness to take on more debt. Though to be fair, the bulk of household debt typically relates to home loans, and your home is an asset that should grow in value over time.

Indeed, home ownership has helped generate valuable wealth for many Australians as the value of their homes and investment properties have skyrocketed.

Nonetheless, carrying large amounts of debt means paying solid interest charges – money you could be investing elsewhere.

That’s why it pays to have a long term plan to pay down debt.

Making extra repayments on your home loan is a simple way to clear the balance sooner and save a bundle on interest.

It also helps to avoid treating your home like an ATM. Topping up your mortgage to fund not-so-valuable purchases like an annual holiday just adds to the debt burden.

While the balance of our credit cards may pale into comparison with our home loans, putting purchases on the plastic is an easy way to lose track of where your money is going. It can also mean copping the full brunt of high card interest rates.

Aim to use a debit card when you’re out shopping. It’s a simple way to live within your means, and that’s a starting point in being able to focus on paying down your home loan rather than building yet more debt.

By Paul Clitheroe

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Source: AMP 7th March 2016

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