Very Bad Debt

I often get asked what a Financial Planner does and the benefits of working with a Financial Planner. A lot of what I do is filtering through complex strategies and investments for my clients and finding what will suit them best, ie doing for them what they are unable or unwilling to do for themselves. However, sometimes my job is about helping people break bad habits and sometimes those habits are doing things that I think are common sense not to do.

Here is an example, I had a client that strongly believed that having money in a savings account was crucial and I must agree, I always encourage my clients to set up an easy access cash reserve for emergencies. In some cases this can be the redraw facility or mortgage offset account on your home loan as long as you have quick and easy access when you need it.

This client had managed to save $10,000 and had it sitting in a high interest bank account (currently paying 2.75%). Because of their understanding about saving they decided to take out a personal loan of $10,000 when they wanted to do an extension on their home which they were paying around 7.5% interest on. My advice to this client was to use their savings to clear the personal loan (as they would effectively be earning nearly 5.0% interest doing that) and then start rebuilding their savings by redirecting the amount they were paying each month off this loan back in to their savings account (plus more if possible, to build it up quickly). Had I have met this client before the extension, I would have suggested they save up the funds for the extension before going ahead, so they did not have to touch their savings, but you can see how sometimes our “habits” are not always as good as we think they are.

I have noticed recently that there are a couple of ads on TV for quick, easy personal loans, which are suggesting the loans be used for Holidays, Renovations and even parties. Unfortunately it is ads like this that are teaching people bad habits. Borrowing money for lifestyle items is pretty much the worst financial choice you can make, with the exception of your family home. Your $5,000 holiday could turn in to an $8,000 holiday very quickly when you work out the interest you pay over the term of the loan. This is common sense to me, but I can see how people who do not know any better may get the wrong idea when seeing things like this on the tv. What can be done about it? I will keep educating my clients, who will hopefully educate their children and writing blog posts like this to get the word out.