Over the last 15 years of operating here in Raglan we’ve put thousands of people (local and across NZ) into debt. That sounds bad, but to put that into perspective we need to look at the distinction between good debt and bad debt.
Good debt contributes to your wealth and happiness and obtains something useful, for example a mortgage to buy a home, a student loan to obtain a tertiary qualification or a business loan to acquire or grow a business. Good debt can bring long term financial benefits if applied well.
Bad debt is the opposite. It’s money borrowed to purchase rapidly depreciating assets or consumer products, for example credit card spending, loans for luxury items that don’t hold their value, payday loans, buy now pay later and car loans. Bad debt makes it difficult to achieve your goals, can erode your credit score, and is typically regretted.
In February we saw 6 of our clients make the final payment on their mortgage. Each of these people initially took a 25 or 30 year mortgage within the last 15 years. They used different methods to repay their mortgages which I’ll detail below, but they all had one thing in common:
They all avoided bad debt and used good debt in moderation.
Here’s what they did to repay their mortgages:
One client received an inheritance and used it to repay their mortgage.
Four clients structured their mortgage payments so that they overpaid each week/fortnight/month and ended up halving the time to fully pay off their mortgage.
One client upgraded their home, kept their first home and turned it into a rental. 10 years later they sold the rental and used the sale proceeds to pay off their mortgage.
Aside from the inheritance, each of these people stuck to a plan to repay debt quickly and now have between 10-15 years of working life before retirement with no mortgage. They can use their incomes to save or invest to have comfortable retirements and still have enough money to travel and have fun in the meantime.
Before you borrow money, ask yourself if the debt is going to help you achieve your goals or steer you away from them. If it’s not going to help, consider giving it a miss and using what those payments would have been to pay down your mortgage or other debt you may have quicker.
Of course if you don’t have a plan to reach your goals you’re more likely to succumb to bad debt and less likely to become one of those ‘lucky’ people who’ve paid their home off early. Everyone’s circumstances are different so reach out to us for tailored advice.
