Whilst this is a wonderful time of year for many of us, it can also be the season to spend, spend, spend …………fa –la –la- la – la - la! If you are anything like me, then it is the time of year when your credit card gets a real work out!
We all joke about this, but unfortunately there is another more concerning side. Maybe the pain does not hit until the credit card statements arrive in January, but nevertheless at some point we will all have to pay for all our generosity with our presents!! I do not want to be the party pooper and burst your Christmas cracker but please consider this graph:
Ten years after the global financial crisis – which many trace to the collapse of two Bear Sterns hedge funds in July 2007 – Australians are more indebted than ever, largely because of mortgages.
Official data, published by the Reserve Bank in April 2017, showed that Australian households owed debt in the March quarter equal to 190 per cent of their yearly disposable income – a new all-time high. Australia’s debt-to-income ratio concerns many experts because it is globally unusual – and because high household debt frequently coincides with financial crises.
Not even the US, just before it plunged much of the world into economic chaos, had a debt-income ratio as high as Australia’s current 190 per cent. Estimates put US household debt closer to 140 per cent in 2007.
Furthermore, key findings from the ABS report on Household Debt in Australia included
· In 2015-16, based on the ratio of debt to either income or assets, around 3 in 10 households (29%) were classified as ‘over-indebted’.
· Debt growth has outpaced that of incomes and assets during the same period, helping to drive the proportion of households who are over-indebted up from 21% in 2003-04 to 29% in 2015-16.
· Owners with a mortgage were the most likely households to be over-indebted (47%) based on tenure type. Households with a reference person aged between 25-34 years (33%) and 35-44 years (34%) are among those most likely to be over-indebted based on age group. Of those households with a property debt, 62% of 25-34-year-olds and 51% of 35-44 year-olds were over-indebted.
Of course, I can understand that retailers have businesses to run and many have had a hard time over the last few years, but what does concern me are the retailers who advertise ‘5 years Interest Free, No Deposit – with monthly payments to December 2022’. Of course, the small print does say that “At the end of the plan, interest will be charged at 24.99%” There is also a fee of $99 on some credit cards! Whilst they also say this is only available to approved applicants, I cannot help thinking that these deals are likely to be taken up by those who can least afford them and who are already overstretched. Do they realise what they are actually committing to?
So is all debt bad? No of course not – after all - I started this article by saying I am giving my credit card a good work out! However we need to be able to pay for all these goodies!!
As part of one of the financial courses that we run, we look at personal finance and use a fictitious example of a guy, Nick, who is in big financial trouble – too much debt some of which has been borrowed from a rather nasty character who is threatening poor Nick with knee capping if he does not get paid immediately!! So how do we rescue Nick’s kneecaps? Tough love you may call it but Nick has to sell some of his assets, so he can pay off some of his debts – obviously starting with the loans with the highest interest rates first. For many of us, the credit card must be the priority.
If this all sounds rather too familiar to you, can I urge you to start 2018 with a clear out. It is amazing how much we manage to accumulate - maybe an eBay session or a garage sale is overdue and who knows what you could realise?
Another good approach is to start listing all your expenses to understand where the money is going. I am sure if you did this, it might change some of your actions. Then set yourself a budget. Like Nick, some tough love might be needed to get you back on track, but it might mean that you can have a Silent Night and……………….