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Ask Paul: I owe $30k in consumer debt - should I pay it off?

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Nicki: I'm 32 with no dependants and earn around $70,000 gross a year. The only assets I have are my vehicle, jewellery and electronics.

My super is $86,000 and I have a HECS debt of around $26,000, and around $30,000 of personal loans and credit card debt combined.

I'm not sure which direction I should go to better my finances for the future.

Should I just concentrate on paying off my debt and not worry about putting money away for savings or towards super?

Pauls' verdict June

Paul's Verdict

Paul: Hi Nicki. This is always a great way to start a fight with my wife and her friends, but I think anything shiny and sparkly bought via a high-margin retail store is not an asset.

Mind you, as long as jewellery is bought with cash and not a credit card at high interest, I have no problem with owning it as you would clothes - it's a lifestyle thing.

Trouble is my wife is always on a winner when I mention my sailing boat is an asset.

As she, sadly and correctly points out, not only is it also a lifestyle thing, it depreciates rapidly and costs a heap to run.

Anyway, let's put boats and jewellery aside, along with your electronics.

They depreciate faster than my boat.

Your car I am happy to call an asset but it is a depreciating and will cost heaps to run and maintain. But it does have resale value, which is handy when you trade it in.

Let's finish with the last of the bad news.

Debt comes in three varieties: good, bad and terrible. Good debt is low-interest money you borrow to buy a property or other sensible investment.

It is good debt because interest rates will be lower than for other debt and you are buying an asset that over time should grow in value and pay rent or dividends.

Bad debt is a car loan. It is a necessary evil for most of us but interest rates are higher, usually around 10%, and the car depreciates. Terrible debt is high-interest credit card debt.

HECS/HELP is interesting. I argue it is good debt.

It only grows with inflation, no interest is paid and you pay it back once your salary exceeds a pretty high $53,345.

As you are on $70,000 you will be paying back about $850 a year. My advice is not to worry about it and just let it be paid back over time while you are working. I would love some no-interest debt!

So the best way for you to go is to get stuck into your $30,000 worth of personal loans and credit card debt. Make a list of these debts and their interest rates.

From here it is easy: just pay down the highest-interest debt first. Once you knock that off, move to the next highest and keep going until you hit zero!

The logic here is very compelling. You are building super anyway via your employer's contributions. If you save money with the bank you'll earn less than 3%.

The typical super fund is averaging around 8% to 9% each year over the past few decades.

But your credit card debt is likely to be more than 18% and your personal loans more than 10%. So get them paid off first.

Once you have done this you can really save and I do like the idea of building savings in your name. The problem with super is you can't access it until you retire, which for you is more than 30 years away.

And while you are building all these great money habits, do yourself a big favour if you have not already done this and go to the government's MoneySmart website and use the planner to do a detailed budget.

At 31 with no dependants, a good job and money building in super, things are moving in the right direction.

The trick now is to get your money under control via a budget, clear that high-interest debt and start building wealth.

Age is very much on your side but it is really important you develop good money habits now.

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Paul Clitheroe AM is a respected financial adviser and Money's chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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