Maximise the money in your 20s - Day 3 - Financial Advice New Zealand

MAXIMISE YOUR MONEY
5-DAY CHALLENGE

SORTED MONEY MONTH
1 – 31 AUGUST 2023

Maximise your money in your 20s: 1 – 5 August

Day 3: Don’t let debt hold you back

Don’t let debt hold you back from your dreams. Establishing and maintaining a good credit score is important for your future endeavours, so pay your bills on time, save and pay for purchases outright and stay out of bad debt. Understand inflation and its effect on long-term debt and cash, and work towards owning a property or some other long-term investment.

Challenge your spending habits with these useful tips from our professional financial advisers:

Money Month - Top tips for in your 20s - Day 3

Build good credit for your financial future

Establishing and maintaining a good credit score is important for future financial endeavours, such as obtaining a mortgage or qualifying for lower interest rates. Pay your bills on time, keep your credit card balances low, and avoid taking on unnecessary debt. Regularly check your credit report and correct any errors promptly.

Stay out of bad debt and embrace financial freedom

Don’t let debt hold you back from your dreams. Debt locks you into repayments for a long time and you end up paying a whole lot of additional interest over that time. If you can, it’s best to save up and buy things like cars and travel experiences outright. You can then use the money you’ve saved from all that interest into buying a house or some other investment further down the track.

If you have accumulated high-interest debt, such as credit card balances or student loans, prioritize paying them off as soon as possible. Allocate extra funds towards debt repayment, starting with the highest interest-rate debt first. Being debt-free not only frees up your income but also empowers you to pursue your passions and invest in your future.

Understand inflation and its effect on debt and cash

As we all know, high inflation puts a strain on your budget as our costs of living increase. However, did you know high inflation can mean good things for debt? High inflation reduces the real debt value, be it a mortgage or student loan, as the amount is worth considerably less in an inflationary environment than when you originally borrowed it. So, while inflation increases prices, it also devalues dollars. The longer a debt remains, the less the value of that debt could be worth to you in terms of spending power.

Let’s say you bought a house with a fixed-rate mortgage of five years. The value of your house increases by x amount during this time, while your mortgage repayments remain the same on the fixed term. You don’t pay more because the house is worth more, improving your loan-to-value ratio.

Let’s say you purchased the house as a rental and the rent has increased over the 5 years, this will also enable you to increase your mortgage payments to pay your loan off faster, saving you even more money.

Or let’s say you buy a new car with a fixed-rate personal loan. Yes, the real debt value of the loan will decrease in time with inflation increasing the price of everything around you, however, unlike a house that increases in value over time, the value of your car reduces with age, use and wear and tear.

So, think about what will benefit you most in the long term. When it comes to property, ‘buy and hold’ can be a good long-term wealth-building strategy.