We provide a full range of financial planning services to our Perth clients, but one of the first questions we ask if you plan to build wealth, is about your level of debt. At Approved Financial Planners, the road to effective financial planning begins with taking charge of your debt and monthly expenses.
We can help you set up debts such as credit cards, student loans, leases, mortgages and personal loans in a way that helps you minimise interest payments that could be spent towards securing your future.
Debt isn’t always bad, but when it drags on without a plan, it can severely hinder wealth-building. Getting rid of the wrong debt changes your financial landscape: more cash flow, less risk, more freedom to invest, save, and plan for the future.
Types of Debt: Personal vs Income-Producing Debt
To set a foundation, it’s crucial to distinguish between personal (or consumer) debt and income-producing debt. The difference matters:
| Type | Definition / Examples | Cost & Risks | Potential Benefit |
| Personal (non-productive) debt | Credit card debt, high-interest personal loans, and debt used for consumption (holidays, clothes, etc.) | High-interest (often unsecured) loans drain cash flow and increase financial stress. Debt usually compounds without building an asset. | None (or very little). These debts are liabilities, not assets. |
| Income-producing debt | Mortgage on a rental property; loans used for business investment; sometimes education (if it leads to significantly higher income) | There may be risk (property values, business failures, study ROI), but interest may be lower, tax deductions may apply, and gains (capital or income) may more than offset costs. | Can lead to increased net worth, passive income streams, and compounding growth. |
Understanding this difference helps decide which debts to prioritise for repayment and which borrowing might be acceptable if managed well (for example, borrowing to invest in high-return opportunities).
Why Debt Management Should Be the First Step to Build Wealth
Before considering investments, retirement plans, or asset allocation, managing debt is often the best first step for most people. Here’s why:
- Interest drag: High interest rates on unsecured debt (e.g. credit cards) can consume a large portion of any income surplus. The more you owe, the more of your income goes just to servicing debt, which leaves less to save or invest.
- Cash flow & flexibility: Fewer debt payments mean more discretionary or “free” cash. That allows saving for emergencies, investing, or dealing with life changes (job loss, illness) without crisis.
- Risk reduction: Debt amplifies downside risk. If interest rates rise, income drops, or expenses increase, high debt becomes difficult to service. Eliminating (or reducing) debt builds resilience.
- Psychological benefits: Debt stress can erode decision-making, keep people from taking productive risk, or stop them from making strategic financial moves.
- Opportunity cost: Money spent on debt interest is money not being invested (in super, shares, business, etc.) where, over time, returns may exceed the cost of debt. By reducing debt, more capital becomes available for higher-return uses.
Benefits of Reducing Key Debts in Australia
Let’s go through specific common debt types and their benefits when reduced or eliminated.
Credit Card Debt
- High interest rates: Many Australian credit cards charge ~17-20% p.a. on balances that are carried. (Australian Parliament House)
- Rapid cost: Because interest compounds and minimum payments tend to be small, balances can linger for years.
- Benefit of reducing/eliminating: Immediate cash flow improvement; fewer fees; psychological relief; ability to shift those payments toward savings or investments.
Recent data: Australian credit card debt (total outstanding) is tens of billions, with significant amounts accruing interest. (The Guardian)
Student Loans (HELP / HECS etc.)
- Australia’s reforms: In 2025 the Australian government passed a law to wipe 20% off student debt for over 3 million people, removing about A$16 billion in debt. (Department of Education)
- Adjustment to repayment threshold: Threshold raised (from ~$54,000 to ~$67,000), meaning lower-income earners begin repayments later / at lower amounts. (Ministers' Media Centre)
- Benefit of reducing: Less burden early in a career; more capacity to save, invest, contribute to superannuation; ability to accumulate assets sooner (home ownership, investment).
Mortgages
- Mortgage burden rising: Australia’s total long-term (mostly mortgage) debt stands around A$2.9 trillion. (Firstlinks)
- Many Australians carry mortgage debt into older age; for 55-64-year-olds who own a home, over half still have a mortgage. (Firstlinks)
- Benefit of reducing/eliminating: Lower interest cost, more equity; more stable housing costs in retirement; ability to use funds that would otherwise go toward interest for retirement, investment, or enjoying life.
Personal Loans and Other Consumer Borrowing
- These include unsecured loans, car loans, buy-now-pay-later (BNPL) debts etc. They tend to carry higher interest than secured debts.
- Benefit of reducing: Again, reducing interest burden, freeing cash for investment or saving, reducing risk of default or credit score problems.
Assessing Your Current Debt Situation
Before you make a plan, understand exactly where you stand. Steps include:
- List all debts: For each debt, record:
- Type (credit card, personal loan, mortgage, student loan, etc.)
- Amount owing (principal)
- Interest rate / fee structure
- Regular payment amount
- Secured vs unsecured
- Any tax implications (e.g. debt used for investment)
- Understand income & essential outgoings:
- Net income (after tax, super, etc.)
- Essential and fixed expenses (housing, utilities, food, transport)
- Minimum debt payments required
- Calculate your debt-servicing ratio / spare cash flow:
- How much of your income goes to debt + essentials.
- How much remains each month.
- Check credit score / credit history:
- Late payments, defaults etc increase cost of borrowing and limit options.
- Settle priorities:
- Which debts cost you most (interest rate, fees)
- Which debts are most burdensome psychologically or financially (payment schedule, risk of default)
Creating a Debt-Reduction Plan with Clear Milestones
Having assessed the situation, a plan with milestones gives direction. Here’s a method you can follow, with suggested structure.
- Define the goal: “Be debt-free” may be vague. Specify: eliminate credit card debt in 12 months, reduce mortgage by X, etc.
- Choose a repayment strategy:
- High interest first (“avalanche”): Pay off highest interest debts first (credit cards, personal loans). Minimises total interest paid.
- Smallest balance first (“snowball”): Pay off smallest debts first to get quick wins / psychological momentum.
- Hybrid: Sometimes combining both.
- Set milestones: Break the goal into smaller, measurable steps, e.g.:
- Pay off one credit card by month 3.
- Reduce student loan by 20% in year 1.
- Refinance / renegotiate mortgage terms by month 6.
- Increase extra repayments as mortgage interest falls.
- Make incremental adjustments:
- Reallocate any windfalls (tax refunds, bonuses) to debt payments.
- Tighten discretionary spending.
- Consider ways to increase income (overtime, side income).
- Refinancing / restructure options:
- Consolidate debts if you can get lower rates.
- Refinance mortgage to better interest rates or terms.
- Talk to lenders about hardship or payment adjustments, if needed.
- Monitor progress:
- Regular check-ins (monthly or quarterly).
- Keep track of remaining balances, interest saved, cash flow improvements.
- Adjust the plan if income changes or unexpected expenses arise.
Role of Financial Advisors in Achieving Debt Freedom
Professional help can accelerate or smooth the path to being debt-free. Key ways advisors assist:
- Debt audit and structuring: Help map out all liabilities, compare cost of different debts, recommend which to pay down first.
- Interest / rate negotiation: Advice on whether to refinance, consolidate, or negotiate with creditors.
- Budgeting and cash flow planning: Showing clients where money goes, how to free up extra payments toward debt without neglecting essentials or emergency buffer.
- Behavioural support: Accountability; many people benefit from having a plan and someone tracking progress, helping to maintain discipline.
- Integrating debt plan with wealth plan: Ensuring that while debt is being paid off, other important goals aren’t ignored (superannuation, insurance, emergency funds).
- Risk mitigation: Advising in the event of rate rises, recessions, or life-events (illness, job loss) so that debt plans are robust.
- Tax and legal advice: For example, implications of student loans, property tax, investment debt (negative gearing), etc.
Putting It All Together: A Sample Debt Freedom Roadmap
Below is a hypothetical example of how someone in Australia might lay out a 2-year debt elimination plan.
| Month | Milestone | Action Items |
| 0 | Baseline | List all debts; calculate interest rates; determine spare cash flow; set goal: eliminate credit card debt; reduce student loan by 20%; extra mortgage payments of $X/month. |
| 1-3 | Phase 1 | Eliminate smallest high-interest credit card; redirect its payment to next highest interest card. Review monthly budget, cut non-essential spending by 5-10%. Establish an emergency fund (e.g. 1 month of expenses). |
| 4-6 | Phase 2 | Pay off remaining credit cards and personal loans; negotiate or refinance where possible; ramp up payments toward student loan; start making small extra mortgage repayments (if financially feasible). |
| 7-12 | Phase 3 | Reassess interest rates on mortgage; consider over-payments or refinancing; aim to reduce student loan by target (e.g. 20%); build buffer for unexpected. |
| Year 2 | Final phase | Focus surplus cash flow on mortgage debt while maintaining savings; reassess other goals (investments, super, property); aim to be mortgage-light or mortgage-free depending on circumstances. |
Data & Evidence: What Research in Australia Shows
- Australia’s household debt (mainly mortgages) has grown substantially; for example, long-term loans on household balance sheets are about A$2.9 trillion. (Firstlinks)
- Many pre-retirees carry mortgage debt. For those aged 55-64 who own homes, ownership with mortgage is over 50%, average mortgage for that age group ~$230,000 in recent data. (Firstlinks)
- Credit card debt is large, and many balances are accruing interest. In late 2024 / early 2025, outstanding credit card debt in Australia was approx A$42-50 billion (depending on what’s counted), with average interest rates around 17-20% on those balances being carried. (Money.com.au)
- The 2025 government reform reducing student debt by 20% (A$16 billion) and adjusting repayment thresholds is a major policy recognition of how student debt impedes financial flexibility for many young people. (Department of Education)
These data points show that debt isn’t just a theoretical problem—it’s a real burden for many Australians and reducing it yields both individual and systemic improvements (more resilient households, less risk in the financial system).
Actionable Tips and Common Pitfalls
- Don’t ignore small debts: Even low-balance debts with high interest can become expensive over time.
- Avoid swapping debt for more debt: Consolidation works only if the new rate is lower and fees don’t offset saved interest.
- Emergency buffer first: Before using all cash for debt, having some savings (e.g. 1-3 months' expenses) prevents having to re-borrow in crisis.
- Avoid lifestyle creep: As income rises, it’s tempting to increase spending. Direct excess toward debt payoff instead.
- Watch for variable rates and inflation: Debts with variable interest rates (like many home loans) react to rate changes; inflation‐indexed student loans are also subject to indexation pressures.
- Balance paying off debt vs investing: If you have a low-interest mortgage but can get a higher return in super or investments, there may be an optimal split. But many advisers argue: eliminate high-interest debt first.
Conclusion
Eliminating personal debt (especially high interest, unsecured debt) is among the most effective levers for building wealth in Australia. It frees up cash flow, reduces risk, and allows you to focus on income producing investments, superannuation, or property equity. It’s not enough to just want to be debt-free; you need a concrete plan with milestones, self-awareness of your debt burden, and often professional advice to guide through tricky decisions (e.g. refinancing, investing while paying debt). For many, the path to wealth starts not with returns or markets, but with making sure debt is under control.
References
- CareSuper. “Understanding good and bad debt.” November 2024.
- Kearns, J. “How risky is Australian household debt?” RBA Research Discussion Paper, 2020.
- Jennison, S. & Miller, M. “An Update on the Household Cash-flow Channel of Monetary Policy.” RBA Bulletin, January 2025.
- Reserve Bank of Australia. “Household and Business Finances in Australia.” Financial Stability Report, April 2023.
- Firstlinks / ABS. “The rising tension between housing debt and retirement balances.” 2024.
- Money.com.au. “Australian credit card debt statistics 2025.” Based on RBA and Canstar data.
- The Guardian. “Australians rack up record credit card spending as growing numbers struggle to pay off debt.” 8 February 2025.
- Department of Education, Australian Government. “20% reduction of student loan debt.” August 2025.
- Australian Government, Ministers for Education. “New data reveals state by state benefit of Labor’s plan to cut student debts by 20 per cent.” 2025.
- Reuters. “Australia wipes $10 billion off student loans, targeting cost of living relief.” July 2025.
- Morningstar Australia. “Is a mortgage actually ‘good’ debt?” 2024.
- Maclennan, D. et al. “Housing wealth and the economy: All that glitters is not gold.” UNSW, 2021.
- Parliament of Australia, Senate Economics Committee. “Explaining the ‘stickiness’ of credit card interest rates.” Committee report.
- Senate Economics Committee, Australia. “Overview of the Australian credit card market.”
