Ask An Advisor

Hello and welcome back to Ask An Advisor.

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The week’s question

"What are some of the best tips to help me get out of consumer debt that I racked up at university?”

- Monique, SA

This week’s advice

This week’s advisor is Ben Wauchope, Financial Advisor and Director of Wealth Health co.

This response is an excerpt from a recent episode we did with Ben. This was his response:

It's important to define what consumer debt actually is first.

Consumer debt refers to the sort of debt incurred by individuals for personal or household consumption purposes. So taking out debt to acquire everyday expenses for major purchases, things like credit cards, personal loans, car loans or buy now pay later services which are quite popular these days.

So in terms of those debts, and tips to help get out of them - the first mistake I see a lot of my clients do is solely focus on paying down their consumer debt first at the expense of generating something like an emergency fund or cash reserve.

I always advise my clients to build a cash reserve first, before paying down their consumer debt because the issue is that you're going to make some progress paying down this consumer debt. But then if you are hit with any other unexpected costs, then you don't have any other savings to rely on to pay those expenses. And then you are just forced to rely back on other consumer debt, like taking out more credit cards. Then you just get in this sort of debt trap.

So I think the first thing is to make sure that you've got a cash flow plan in place. You need to be spending less than you earn, and then you start building that buffer initially. That might be five, or ten of fifteen grand.

Then you focus on paying down that consumer debt from there.

If you've already got that financial sort of cushion in terms of a cash reserve, that you're sort of stuck with this high interest debt that's accumulating over time.

I had a client and she had one of these payday loans and the interest rate was 49%. So she was just paying $100 a week to this. And it was just interest. It wasn't paying it down.

In that case, you could look at something like a balance transfer on a credit card that has an interest free period. So that generally you have 12 to 24 months where you can take over that debt with a new credit card and pay down the balance. You would only just use this as a way to clear that existing debt and then pay it off within the interest free period. So that's one strategy.

About Ben Wauchope

Armed with a Bachelor of Commerce from UWA, Ben started his financial planning career in 2013 and has since worked for three different private wealth, broking and accounting firms as a senior financial advisor.

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