The Debt Game

“The borrower is servant to the lender”

– Proverb 22:7

Oh, the debt game. This thing called debt has kept me awake countless number of nights.

Know the game and why you are playing it?

There are two parties playing the debt game. The borrower and the lender. Should be simple! Yeah, right!

Going into debt has been a human transactional experience long before physical money came into existence. Debt is a promise and an exchange between two or more parties. If you give this to me then I’ll give that to you. If a farmer gives you corn then you might promise to give the farmer carrots in return (when they are harvested). If the bank gives you money you pay the bank back with money plus some more money to compensate the bank for the ‘loss’ of what the money they lent you could have earned if they kept if for themselves. Does that make sense?

To provide further historical context, physical money came into existence around 5000BC as payment to soldiers after winning a war. This was to stop soldiers pillaging the spoils of war. So, I guess what I’m trying to say is debt in its various forms is here to stay. It is not going away and I think it’s important that we learn about it and how to handle it.

I really don’t think it is necessarily the best idea to completely avoid going into debt. Debt is part of our lives. It really exists in some form in all cultures. I actually think it’s best for most of us to learn the rules of the debt game and then learn how to play the game to our own advantage.

Debt is debt.

In the money world we talk about good debt and bad debt.  Good debt is debt that you can claim a tax deduction on. Bad debt is everything else. This doesn’t sit quite right with me. I think debt is debt. Neither good nor bad. It is just a thing and usually, it is just money. I think it’s the reasons behind why we are going into debt that are more important. Better questions to ask yourself are what am I getting from this debt? What is it going to give me? And, if everything goes to shit can I pay this debt off, fully?

Debt just comes at a cost and it will either be a positive or negative cost. Simple. And this cost may change over time. A debt you were happy to carry for a few years may become a terrible burden in later years…

Of course, there is the obvious question of can I pay this debt off if I need to? But I think the underlying question to be answered is more about our behaviours and beliefs around debt. What belief and possibly compulsive behaviour drives me to use a credit card to purchase a new outfit when I know I don’t have enough money to pay for this months’ electricity bill? For me a big driver with debt and spending is a belief that I am not good enough and won’t be accepted by my tribe. I guess that sometimes combines with a compulsive spending behaviour that results in the need of a new outfit to be seen as good enough. When I wear that new outfit, I feel ‘put together’ if you know what I mean. It’s like a fabric armour that protects me. Like my old blankie or teddy bear.

On the other hand, going into debt by taking a mortgage has been one of the best financial decisions I have made. It’s been hard at times and sometimes downright frightening but I am glad I did it.

How to strategically play the game of debt

Have a strategy for any debt you go into. Like when I play Monopoly I always try and buy the purple properties and the railways! I know this is what I am going to do before I start the game. And it’s a pretty good strategy.

Nowadays, as a general strategy I will only go into debt to buy a property, a car and I only use my credit card for emergencies and travel. I have my car through a mortgage chattel loan through my business.

A specific strategy for say a credit card debt is that I will always pay the entire amount in the interest free period. I also never use buy now/pay later services. Never.

I did use my credit card and payday loans when I was doing it tough to pay bills. This made my debt worse but it did in retrospect help me get through some tough times. Even though it helped me, I did find myself in a worrying position with the amount of debt I held in credit cards. The big thing here was that I kept in contact with the debt providers when I could not meet their terms and conditions. I kept myself employable and I also worked on understanding my beliefs about money and changing money behaviours (and other behaviours) that were not working for me. Don’t get me wrong, I’m no saint but I had to make a change.

Even though I wasn’t always taking on debt for the right reasons, one of my big strategies that has always served me well is to always make sure I am employable. And I have made sure I am employable by keeping healthy (mentally, physically, emotionally and spiritually) and updating my skills. And not just work skills, emotional skills as well. If I am employed I can pay for the bare necessities of life as well as obtaining debt and paying off debt. On a macro level it’s the role of our society (and government) to give all people the chance to be employed and update their skills!

The rule before the rule has got to be don’t spend more than you earn. That being said, these are my rules when I play the debt game.

The ten general rules of the game

1. Make friends with your bank, credit card statements and credit score. Check them monthly, keep your receipts and mark them off the statement. An old school habit, but important especially in these times of identity theft and fraud.
2. Put your credit card in a drawer and use for emergencies and travel only and use a debit card.
3. Work out a spending, debt and savings plan and list your debts higher interest rates first (pay these off first) or consolidate into a lower interest rate loan or drawdown on your mortgage offset account (if you have one) to pay it off.
4. Save, save, save. Here’s a wild idea: save money so that you do not have to go into debt or if you go into debt you do not need to borrow as much.
5. If you are going to buy a home and taking out a mortgage,  always use an offset account with a drawdown facility. Mostly a variable interest rate is best and check out the exit clauses if you want to refinance or pay off your mortgage early.
6. Think about salary sacrificing your car if you are on a higher income or better still if you have to borrow to buy a car use a personal loan and buy a standard type car like a Mazda or Toyota and keep it for 10 years before replacing it.
7. You can borrow to invest but a word of warning: if the investment goes down you are losing double the amount. So, this strategy is for a more experienced investor, someone who is on a high income (and higher tax bracket) and is willing to take a risk (Warning: speak to a financial planner).
8. Take out life, income protection, TPD and trauma insurance to cover yourself if you lose your job, have an accident or get sick. Factor the cost of the insurance into the debt and life, TPD and income insurance can be held within your super (if you’re in Australia) It is worth it. My thoughts are if you cannot afford the insurance to cover the risk of your debt then you cannot afford the debt. I’m not paid by any insurance companies to say this either.
9. Shop around for the best deal and look at the interest rates you are paying on a quarterly basis. Do it at the start of each season. Hustle your debt provider for a better deal.
10. Know when the game is over… (what happens if you can’t pay) – sometimes you have to get ‘debt sober’. You just have to stop going into debt and stop playing the game.  Easier said than done. Seek help.

When you’ve reached the end of the debt game, your debt is out of control and you can’t meet the minimum payments, what do you do?

If you haven’t already, call your debt provider/s and tell them the truth about your situation. Organise a financial hardship plan. Look at what you can sell and use the money to pay down your debts. See below for some phone numbers where you can find support.

If you are currently on lower income that cannot service any form of debt, then debt is not for you and it is irresponsible to have money offered to you.

I feel really judgemental saying that, and in a way I am being judgmental (of the debt providers) but it is true… banks, buy now/pay later, payday lenders and mobile phone providers take note! Taking out a debt to study like HECS or FEEHelp so that you can learn new skills and possibly earn more is a different kettle of fish. There are different issues around lending to lower income earners that really warrant another article. If you’re on a lower income just wait and use a pre paid mobile phone for awhile!

A quick word on superannuation and bankruptcy.

If you are experiencing severe financial hardship part of your superannuation benefit can be released in certain circumstances. If you are at risk of losing your home because you are absolutely unable to meet your mortgage payments part of your superannuation can be released on compassionate grounds. Check out the Australian Taxation Office’s website here for more information (Early Access to Superannuation) and think about making an appointment with a financial counsellor or financial adviser.

Bankruptcy is a legal declaration that you are unable to pay your debts. When you apply for bankruptcy you are released from your debts and creditors have to stop calling you. But it’s not necessarily a fresh start. Once you are declared bankrupt, you are classified as bankrupt for 3 years and a trustee is appointed to look after your affairs. Your bankruptcy will be listed on your credit report for 2 years from the date your bankruptcy ends, or 5 years from the date you became bankrupt (whichever is later). It will also appear on a publicly-accessible register called the National Personal Insolvency Index (NPII). You cannot be a director of a company without leave of the court and you may not be able to work in particular trades and professions. See AFSA’s website for more information on employment restrictions.

Let’s face it debt is here is to stay and in every society there is some form of debt or quid pro quo. You do this for me and I’ll do that for you. It is really tempting and sometimes necessary to go into debt and for better or worse debt products are becoming way more innovative and easier to access.

Remember, going into debt is not about being able to meet the repayments required. It’s about why am I going into debt and if everything goes to shit can I pay the whole debt off? And am I insured to cover myself (and my family) if everything goes to shit.