??Warning before taking on more debt

As the economy starts to bite, it’s tempting to turn to debt when we get behind or something goes wrong.

I want to strongly warn you against this and I will show you why.

Before we do, a reminder that this is why, for a long time I’ve said do these 3 things.

? Get rid of a credit card even if you owe nothing on it

? Get rid of get now worry about it later (BNPL)

? Make $500 to help you cover any unexpected costs (build up that emergency fund)

Why? Because sh!t happens.

And it’s never been easier to access credit. Well, that might be getting harder.

But anyway, if you want it, you can find it.

Most people think that the danger of debt is the interest rate.

This is partly true.

Especially when we see a blue bank jacking credit card rates to 20.95%.

Gotta pay for them airpoints/rewards somehow hey!

But this isn’t the ONLY issue with bad debt.

One of the issues is trying to pay it back!

Most people look at the regular repayment and that’s it.

Let me blow your mind for a second.

If you borrow $10,000 for a car, you need to make over $15,000 to pay the DEBT back.

Say what?

Well, there’s a high chance that you’re going to lose 1/3rd of that $15,000 to tax.

And we pay debt back with after tax income.

Repaying a $2,000 credit card will take most people a $3,000 pay rise.

I interrupt this Money Mail to ask for your help. At nextAdvisory.nz we are trying to find a superstar senior accountant to join our team in Auckland. Know anyone? We recorded a podcast with more details: https://open.spotify.com/episode/6lZZrH3yeyZToG0XFDuZLd?si=vRxWsjM5QZ6DqkedCOI2hg

You see, tax rates haven’t moved with inflation. They were last set in 2010.

As incomes have risen (due to inflation), more and more people have ended up earning income over $48,000.

Every dollar of income between $48,000 & $70,000 is taxed at 30%.

That’s effectively a third.

Income between $70,000 and $180,000 is taxed at 33%.

That’s definitely a third.

Some people way smarter than me did some calculations last year. These are now outdated because inflation has made it worse again BUT, these numbers suggest that the 30% tax rate shouldn’t kick in until…

$72,891 to $106,298.

This is IF tax rates were indexed to inflation right back to 2010.

Let’s ignore all the should they / shouldn’t they for a second and just understand this.

A lot of your income under $48,000, is spent covering every day living and life costs.

I.e. median rent in NZ in January was $608 a week. $608 x 52 weeks = $31,616.

$48,000 salary after tax, ACC & Kiwisaver = $38,405.60

Once you start earning over $48,000, you’re getting taxed at 30% in the dollar on that income above $48,000 (to $70,000).

This is making it very tough to have money left over.

That money left over might be needed to:

? Pay down debt

? Save for an event

? Pay off a credit card

? Save for a house

? Reduce the student loan

No wonder you're finding it tough out there.

Not only are interest rates rising, which are tripping people up and increasing debt amounts, but trying to clear the debt is HARD!

This is why I encourage you not to only look at what the debt repayment amount is, BUT what you’ll need to earn to pay it back with after tax free cash flow.

With 480,000 kiwis getting behind on their payments, I can guess not everyone does this exercise.

This figure will increase as it gets harder to clear this debt.

? Interest rates are high

? The cost of living is high.

? Tax rates are high.

Don’t make it even harder for yourself by taking out dumb debt to buy sh!t you don’t need.

Now, I will give you a scenario.

You earn $50,000 and all of your income is allocated. You have nothing left over. Living pay check to pay check.

You run into a $2,000 emergency.

There are 2 options.

A) Sell some sh!t you don’t need / use

B) Borrow the $2,000

You don’t want to get rid of the kayak you never use or the 3 pairs of shoes in the wardrobe. Why should you? Life’s not fair. You worked hard for that stuff.

Totally, I get it!

So you grab a $2,000 credit card from the bank.

You max it out.

I’m going to be generous and let it be 0% interest for now.

Outcome: you are $2k in debt and at some stage you realise life isn’t fair, you worked hard, and you still have to pay it back because the bank doesn’t give 2 F’s, what you think is fair or how it ‘should’ work.

Oh sorry! Did you want it sugarcoated? Grab a couple of Nurofen.

To clear this card, you have to get some extra work, ask for a pay rise, start a side hustle etc.

You now need to make $3,000 to then pay your tax and be left with the net amount to clear the credit card.

So your $2,000 problem(cost) just became $3,000(income).

This is, of course, if you pay your taxes!

If you haven’t already;

? Remove any access to debt that will tempt you

? Build that emergency fund ahead of the emergency

Hopefully that got you thinking.

If you need more convincing, check out this message I received this week:

Just a message to say thanks for all your content, been listening/reading money mail for some time and in that time gotten rid of debt and just been starting building up an emergency fund, just found out yesterday we have an upcoming 2k bill for a hot water cylinder but rather than sinking us and going back into debt for it, it’s just an inconvenience that we can pay for in cash. Keep up the mahi, it is appreciated and making a difference to kiwi homes ??????

Be smart with debt.

Happy Easter!

Luke