I’ve heard this song recently a few times on the radio recently and loved it. It’s an older song (1994) by Cake and it’s meant to be a rant to 20-somethings on our excessive “I want it now now now” attitudes. I can’t help but crank it up and bob my head when I’m in the car and hear this song. I vote that they update the video because the video doesn’t do the song justice.

Whenever I hear this song, I think of all my peers, all the fellow generation Y’s and the mentality of instant gratification whether it be a shiny new luxury car and high car payments, a fancy designer handbag, going partying every week, going for expensive dinners and nights out, buying $600 leather jackets etc.  Just like Money Rabbit says (we were thinking the same thing this week despite being on opposite coasts, I guess!), I wonder “how the heck do my friends afford all this?”

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Here’s a guest post from Alban.  He is a personal finance writer at Home Loan Finder, a home loan comparison website.  Thanks Alban for such a detailed post on the “D” word!

Debt is something we all deal with in our everyday lives because we are all in some form of debt. Whether you have a car loan, a credit card or a mortgage, or whether you drive the car you bought with a car loan back to your mortgaged home, paying for fuel with your credit card on the way – we can all do with finding out how to better manage our debts.

1 – Know the types of debt

Debt is often referred to as either good or bad, where good debt is a home loan or investment loan which is held by an appreciating asset, where bad debt is high interest debt such as credit cards or personal loans which have been used to buy depreciating assets. However, these tags can be dangerous if you plunge into a large home loan or abandon the use of credit cards without understanding why.

Instead – keep in mind that bad debt is any type of debt you can’t afford. Your home loan could be bad debt if you borrow more than you can comfortably afford to repay, and your credit card could be good debt if you pay it off before the end of the interest free period and use the bank’s money while your money earns interest.

Therefore, the first thing you need to do when managing your debt is find out about the three true different types of debt:
1. Secured or unsecured. A debt is secured or unsecured based on whether there is collateral against which the loan has been secured. A secured debt is one which involves collateral and the collateral for a loan is usually also the reason for the loan – for example a car loan is secured against the car you purchase, and a mortgage is secured against your home. If you become unable to repay your secured debt and default on the loan, the lender is able to take the collateral of the loan, to cover the outstanding amount. Unsecured debt is one where you didn’t have to put up collateral, such as your credit card and as the amount you owe is unsecured, you often pay a higher interest rate.
2. Instalment or revolving debt. If you make the same repayment amount to your loan each month then you have an instalment debt, because the repayments have been calculated to repay a portion of both the principle and the interest accumulated, so that at the end of the loan term the debt is repaid in full. Revolving debt such as a credit card can have fluctuating repayments depending on the balance of the card and new purchases you have made. With an instalment debt there is no risk that your repayments or your loan amount will change because you have borrowed a specific amount for a specific purchase. With instalment debt you have security and reliability in your repayments and your budget.
3. The source. The issuer of the debt will determine the final features of the debt, most importantly the interest rate, because if you have a Visa card from ANZ Bank and a Visa card from Westpac Bank, the interest rates and fees will be different. This is why you always need to be aware of how your provider is categorising your debt as far as its features and usability.

2 – Know your debt

The next important step to managing your debt is knowing your current debt levels and circumstances. To do this, make up a list or a spreadsheet which includes:
The balances of all of your debts.
The interest rate you are being charged for each.
The term remaining on your contract if it is instalment debt.

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No, I don’t mean Creme de la Mer (the uber expensive face cream), I mean MER, otherwise known as Management Expense Ratio.

From my experience, your investment advisor won’t really tell you about this until you ask for it, or look into it yourself.

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