Thought Starters

Should I pay off my HECS debt early?

It has been the biggest question in Australian financial media this week after university graduates found out their HECS or HELP debt will grow 7.1% at the end of the financial year.

The government doesn’t charge interest on this debt, but it is indexed to inflation (meaning the debt is increased each year to match inflation). So with inflation high, the debt grows more than in years when inflation is low. The question has become: should we try and pay more off before it gets increased by 7.1%?

We asked that question to Jacob McCudden in our latest ‘Ask an Advisor’ episode (Apple | Spotify) and a clip from that interview sparked plenty of debate on Instagram.

There is a little bit of nuance to this debate. And as with so many debates on social media, that nuance gets lost. So, here’s our two cents: it depends on what the alternative to paying down your HECS/HELP debt is.

With every dollar, you really have four choices. So let’s explore what the alternatives are:

• If you’re going to spend it: If the choice is between paying off HECS/HELP debt or buying things you don’t need - pay off the debt. That one is easy.

• If you’re going to save it: Having an emergency fund is critical and the cost of having to sell investments or go into debt to manage an emergency could be far greater than any indexation on student debt. But if you’re already got your emergency fund sorted, paying off HECS/HELP could be a good use of money. Especially if you’re saving to buy a house, paying off your HECS/HELP debt will increase your borrowing capacity.

• If you’re going to pay off other debt: Pay off other debt before paying off HECS/HELP. Sure, the indexation this year might be higher than the interest rate on your mortgage, but over time the interest-bearing debt will be far more expensive than this non-interest bearing HECS/HELP loan. Also, most importantly, HECS/HELP debt is income-contingent. Meaning if you fall on hard times or lose your job, you don’t have to pay it off. You’re not going to have to declare bankruptcy or be forced to sell other investments to pay it off. You can’t say that about other forms of debt.

• If you’re going to invest it: When comparing paying off debt or investing, you can look at expected return. If this debt will increase at an average of 3% a year over the next 20 years and you expect to earn 8% a year over the next 20 years with an investment, then you’ll be financially better off investing. HECS/HELP debt rises with inflation which over the long term averages out to 2-3% a year. So if you think there are ways to make a higher return with that money, then that would be a worthwhile use of it.

At the end of the day, that is the financial side of the equation. The other side of the equation is a psychological one. Debt can be stressful. And if you think your life will be less stressful without a HECS/HELP debt, then pay it off faster. It’s your money, spend it and invest it in the way that best suits you.

And if you don’t like our thoughts or Jacob’s advice, hopefully you’ll hear it from Australia’s favourite finfluencer, The Barefoot Investor.

Why the moon is the next tourism frontier

It has been one of the biggest promises of the past few years: advances in rocket technology, namely making them reusable, and material sciences have made space tourism a possibility. SpaceX, Virgin Galactic and Blue Origin were some of the companies driving the conversation in the 2010s. Now, it is companies like Lockheed Martin, Boeing and Northrup Grumman that are looking to build private space stations and make space a more accessible place.

This article features an interview with a former NASA engineer on the progress and potential of space tourism. The technological breakthroughs have been remarkable. SpaceX and Blue Origin have found ways to take single-use rockets and make them reusable (the analogy given to illustrate the importance - imagine the cost of air travel if the plane was destroyed after each flight) and recently Blue Origin figured out how to extract oxygen from moon dust.

But if you’re interested in space tourism, the company to watch is Axiom Space. They are working with NASA to build the new International Space Station, slated for launch in 2025, and have plans to build more space stations in the years after that which will include hotels and manufacturing facilities.

So space tourism may be in all of our futures. Just make sure you start saving now. The first space tourists will likely be spending millions of dollars on their tickets.

Saudi Arabia wants to do to cricket what it did to golf with LIV

The golf world has been shaken over the past year with Saudi Arabia-backed LIV Golf creating a rival professional tour to the PGA. With billions of dollars of Saudi money, LIV has offered players big contracts and upended many of the established power structures within the golfing world.

Flush with cash and looking for opportunities to diversify their economy beyond their vast oil reserves, the Saudi’s are now eyeing off another sport: cricket.

The model for the Saudi tournament is the Indian Premier League. Founded in 2008, the IPL is the world’s most watched cricket tournament. It is also the highest paying, for now.

Unlike its move into golf, it appears that right now Saudi Arabia is favouring cooperation over competition. Saudi representatives have met with Indian cricket officials and are looking for official sanction from the ICC, cricket’s global governing body. But with deep pockets and an intense focus on professional sports (Saudi Arabia has also recently bought English football team Newcastle United and reportedly tried to buy the Formula 1 for $20 billion) cricket officials have plenty of reason to be wary of Saudi Arabia’s attempt to take their share of the world’s second most popular sport.

Every fifth car sold worldwide this year will be electric

The electric vehicle revolution is here. At first it was a trickle, led by Tesla who managed to make electric cars a sought-after status symbol. Then it grew, as new car makers, especially China’s BYD and NIO, launched new models. Now it is a flood as traditional car makers pivot from internal combustion engine to electric vehicles.

And the numbers are telling the story. In 2020, globally just 4% of vehicles sold were electric. In 2023, the International Energy Agency estimate it will be almost 20%. China is the leading market for electric vehicles, with 60% of the world’s electric vehicle sales happening in the world’s second-largest economy.

The industry is now moving beyond electric cars and starting to move to electric buses and trucks. But with these heavier vehicles comes a whole new set of challenges. The power needed for these heavier vehicles requires weighty and wildly expensive batteries and more powerful charging stations. With heavier batteries comes a trade-off between vehicle range (the distance a truck can drive between charges) and vehicle capacity (the more weight that is taken up by batteries, the less goods that can be transported). But watch this space, because EV makers are leaning into these challenges with Tesla again leading the way - starting deliveries of the Tesla Semi in late 2022.

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