Debt – how much should you have?
Earlier this year I met with a mortgage broker to discuss some potential lending opportunities – the experience was fantastic and I strongly encourage you to find one you trust, as they do a great job. One thing that shocked me though was the amount that financial institutions across the country were willing to lend me.
When it comes to personal financial advice, generally there are no hard and fast rules for answering questions like the one I’ve posed in this discussion. However, in this case I would be confident to say that the answer to this question is you should not have nearly as much as the banks are willing to lend to you unless you have a sound long-term plan in place. Banks will most likely look at your ability to ‘service’ the loan – this is important but what’s more important is your ability to repay the loan in a time frame which is reasonable and means you pay as little interest as possible.
To borrow or not to borrow
Borrowers need to consider risk. When trying to identify how much debt is the right amount for you, it’s crucial you analyse the risks in the context of your personal, very specific goals and objectives. At a high level, you should be thinking about the following issues:
• What is the reason for taking out a loan?
• What is the time frame for repayment?
• How will you pay off the loan?
• Is the amount you are borrowing sustainable across different market environments?
• Repayment frequency versus cash-flow to maintain lifestyle.
• Fixed rate versus variable rate versus both – what is best for you?
Part of my ‘kit bag’ is a tool which I refer to as a ‘Lifelong Cash-Flow Model’ – basically this allows me to project into the future based on a number of different assumptions to help provide clarity around decisions being made today. Nobody has a crystal ball but a tool such as this helps put the odds back in your favour when it comes to making successful financial decisions. For example, I was working with a couple recently where we used this tool to help show them how much debt they may have in 10 years time based on their goals. This was a great way to open their eyes to the sacrifices they will need to make in order to achieve these objectives and really helped them understand what they needed to do from that day onwards to achieve their success.
Getting the balance right
As I said earlier, a bank will simply assess whether you are likely to be able to ‘service’ the loan they are giving you whereas you should aim higher – don’t just try to service it, make sure you can actually pay it off within a reasonable time frame. The less interest you can pay, the better, but if you are going to enter into a debt agreement it’s important you make sure it’s truly necessary, and that once the loan has been repaid, you are in a better position than if you hadn’t borrowed the money. Sometimes this means living in the suburb of your dreams and other times it means achieving your other goals which can include building your wealth – whatever the answer though, think about debt in the context of your goals, not those of the bank.
Chris Giaouris, CFP®
Shadforth Financial Group
Chris Giaouris, CFP®
Chronos Private Wealth
Fitzpatricks Financial, Australian Financial Services Licence (AFSL) 247429. http://www.chronosprivate.com.au/
“I believe financial planning is not solely about investments or strategies, but more importantly, it is about helping people make smart choices with their money so they can focus on things more important than money.”
I have been providing wealth management and holistic financial advice to like-minded clients since 2008. This was initially with a boutique firm called Heraud Harrison who were one of the founding firms that later merged to create the Shadforth Financial Group (SFG). I was fortunate enough to create a number of fantastic relationships with clients and colleagues alike, many of those still being in my life today. But in 2016 I decided to leave SFG to build my own boutique practise which would be (and still is) focussed on a client centric and evidence-based approach.
I co-founded Chronos as I wanted to create a fun and vibrant environment for our staff and clients alike. Sadly, for many Australians, planning for their future is something that either finds its way into the “too hard basket” or gets neglected as everybody is so time poor. My goal is to help clients find their ideal lives, whatever that may look like, whilst at the same time simplifying those things that the world loves to overcomplicate for us. Clearly that involves providing clients with advice but not to be forgotten is also providing clients with education – this is equally important in my view.
I hold a Bachelor of Commerce from Deakin University, am a Certified Financial Planner (CFP®) and member of the Financial Planning Association of Australia. CFP® is an internationally recognised mark and is currently the pre-eminent representation of professional Financial Advisors around the world. I am also a proud member and accredited advisor with the ‘RIAA’ or ‘Responsible Investment Association of Australasia’.
As we all know though, life isn’t just about money! I’m a passionate fan of most sports and love to live an active lifestyle, be that in the gym, on the golf course or futsal pitch. I’m also lucky enough to hear so many amazing travel stories from my clients so as you’d expect the travel bug is regularly spreading through my household. I’m always looking to plan that next adventure!
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