The Financial Planning Association of Australia The Financial Planning Association of Australia

Debt – how much should you have?

| by Chris Giaouris, CFP®

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®

Shadforth Financial Group
Shadforth Financial Group Limited (AFSL 318613)

Chris is a CERTIFIED FINANCIAL PLANNER®  professional and has been providing personal wealth management and financial advice since 2008. Over this time he has built specialised knowledge in superannuation, retirement strategies, tax planning and portfolio management.  Chris also has extensive experience in the UK Pension sector where he has assisted a number of clients with the transfer of their UK superannuation capital to Australia.

He believes financial planning is not solely about investments or strategies, but more importantly it is about helping you (the client) make smart choices with your money so you can focus on things more important than money.


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