FOUNDATIONS · STEP 5 OF 5
Master Your Debt Strategy
Debt is the slavery of the free.
Publilius Syrus
Not all debt is bad, but high-interest debt is a wealth killer. Here's how to eliminate it systematically.
This Page Takes: 20 minutes
Why This Matters
High-interest debt compounds against you. It's negative wealth. Learning to eliminate bad debt while using good debt strategically is a crucial wealth-building skill.
Good Debt vs Bad Debt
Not all debt is created equal. The difference comes down to what you're borrowing for and the interest rate you're paying.
Bad Debt
ELIMINATE FIRST
Debt used to buy depreciating assets or consumables. Usually at high interest rates.
Credit Cards
15-25% p.a. interest
Used for clothes, dining, entertainment, holidays
Personal Loans
8-15% p.a. interest
For furniture, weddings, holidays, or consolidation
Car Loans
6-12% p.a. interest
Cars depreciate 15-20% per year immediately
Why it's bad: You're paying interest on things that lose value or get consumed. This creates a downward wealth spiral.
Good Debt
CAN BE STRATEGIC
Debt used to buy appreciating assets or invest in income-generating opportunities. Lower interest rates.
Home Mortgage
5-7% p.a. interest
Property typically appreciates over long term
Investment Property Loan
5-7% p.a. interest
Tax-deductible, generates rental income
Business Loan
6-10% p.a. interest
Invests in income-generating business assets
Why it's acceptable: You're leveraging borrowed money to acquire assets that appreciate or generate income over time.
The Interest Rate Rule
The True Cost of a Car Decision
A car feels like a transport decision. Historically, it has also been one of the biggest wealth decisions most households make. The same person, same job, three different choices — here is what the numbers look like over five years.
Example figures based on 2025 AU market data. Fuel and servicing excluded — broadly similar across all three options. Individual circumstances vary.
A. Luxury Novated Lease
~$250,000 vehicle
Monthly outlay
~$2,800
Pre-tax savings partly offset — residual value risk at end of lease
Interest cost
Residual risk at end of lease term
5-yr depreciation
~$120,000
Steepest depreciation curve on prestige vehicles
Insurance
~$3,500 / yr
5-yr economic cost
~$185,000
Depreciation + interest + insurance
B. New Car on Loan
$40,000 vehicle, 10% p.a.
Monthly outlay
~$850
60-month loan, $40k at 10% p.a.
Interest cost
~$11,000 interest over 5 years
Rule of 72: 72 ÷ 10 ≈ 7 yrs to double if left unpaid
5-yr depreciation
~$22,000
$40k new → ~$18k after 5 years
Insurance
~$1,400 / yr
5-yr economic cost
~$40,000
Depreciation + interest + insurance
C. Same Model, 5 Years Old
$20,000 vehicle, owned outright
Monthly outlay
$0
Paid upfront. No ongoing finance commitment.
Interest cost
No interest charged
5-yr depreciation
~$9,000
$20k → ~$11k after 5 years — the steepest depreciation was already absorbed by the first owner
Insurance
~$900 / yr
5-yr economic cost
~$13,500
Depreciation + interest + insurance
What that difference does at 7% over 20 years
If the 5-year cost saving were invested as a lump sum at 7% nominal for 20 years (~3.87× multiplier)
B vs C — same model, new vs 5-yr-old
~$26,500 cost difference
~$103,000
extra retirement money
A vs C — luxury lease vs 5-yr-old
~$171,500 cost difference
~$660,000
extra retirement money
Historically, the car decision has been a wealth decision more than a transport decision. Numbers are illustrative; individual costs vary.
Practical considerations
- Depreciation is steepest in years 1–3. A well-maintained 4–6 year old vehicle has already absorbed the sharpest value drop — and modern cars routinely reach 200,000+ km with standard servicing.
- The Rule of 72 applies to car debt too. At 10% interest, an unpaid balance doubles in roughly 7 years. Paying cash, or the shortest affordable term, removes that risk entirely.
- One fewer car entirely is worth considering for households where daily patterns allow it — the cost saving often exceeds $5,000–$8,000 per year when registration, insurance, and depreciation are all included.
The Credit Card Trap
Same $5,000 purchase. Three different ways to pay it back. Three very different totals — at ~20% p.a., Australia's average credit-card rate.
Educational example only. Based on RBA average rates 2025. Your card rate, balance, and minimum-payment terms vary.
A. Minimum Payment Only
$5,000 balance · 20% APR
Monthly payment
~$100 / mo
2% of balance — the typical Aussie card minimum
Interest cost
~$10,000 in interest over the life of the debt
Rule of 72: 72 ÷ 20 ≈ 3.6 yrs to double if left unpaid
Time to clear
~30 years
Total paid back
~$15,000
You pay 3× what you bought.
B. $200 / Month Flat
$5,000 balance · 20% APR
Monthly payment
$200 / mo
Just $100 more than the minimum
Interest cost
~$1,600 in interest
Time to clear
~3 years
Total paid back
~$6,600
Cleared in 3 years for $1,600 in interest.
C. $500 / Month Flat
$5,000 balance · 20% APR
Monthly payment
$500 / mo
Aggressive payoff
Interest cost
~$500 in interest
Time to clear
<1 year
Total paid back
~$5,500
Cleared in under a year for $500 in interest.
What that difference does at 7% over 30 years
If the $100/month gap between A and B were invested instead at 7% nominal
A vs B — difference per month
$100 / month extra
~$122,000
extra retirement money
The compounding effect
$100/mo at 7% for 30 years
~1,220×
return on the extra $100/mo
Educational example only. Past returns don't promise future returns.
Practical considerations
- Minimum payments are designed to keep you in debt. At 20% APR, paying only 2% of the balance each month means the bank earns interest on a balance that barely shrinks. The minimum is a trap, not a strategy.
- $100 more per month changes everything. Going from ~$100/mo (minimum) to $200/mo flat cuts the payoff time from 30 years to 3 years and saves ~$8,400 in interest.
- BNPL late fees can hit a 20%+ effective rate too. Missed Afterpay or Zip payments compound the same way — treat them like credit card debt and clear them first.
Two Proven Payoff Methods
Once you've committed to eliminating bad debt, you need a strategy. Both methods work. Choose based on your personality.
Avalanche Method
MATHEMATICALLY OPTIMAL
Pay off highest interest rate debt first, regardless of balance.
How It Works:
- Make minimum payments on all debts
- Put extra money toward highest interest debt
- When that's paid off, attack the next highest rate
- Repeat until debt-free
Pros:
Cons:
Best for: Logical thinkers who are motivated by saving money and can delay gratification.
Snowball Method
PSYCHOLOGICALLY POWERFUL
Pay off smallest balance first, regardless of interest rate.
How It Works:
- Make minimum payments on all debts
- Put extra money toward smallest balance
- When that's paid off, attack the next smallest
- Build momentum with each victory
Pros:
Cons:
Best for: People who need momentum and psychological wins to stay motivated.
Ripper Wealth's Take
Australian Debt Considerations
Australia has some unique debt situations you need to understand.
HECS/HELP Debt
University debt that's automatically deducted from your pay once you earn over the threshold ($51,550 in 2025-26).
Why It's Different:
- •0% interest, only indexed to CPI annually
- •Income-contingent repayments (1-10% of income)
- •Wiped if you die or become permanently disabled
- •Doesn't affect credit score
Should You Pay It Off Early?
Usually no. Since it's effectively 0% real interest, you're better off:
- ✓Paying off high-interest debt first
- ✓Building emergency fund
- ✓Investing in growth assets
Indexation Timing
Mortgage Offset Accounts
A uniquely powerful Australian debt tool. Money in offset = less mortgage interest, but you keep instant access.
How It Works:
- •Offset balance reduces interest charged daily
- •If mortgage is 6.5%, offset "earns" 6.5% tax-free
- •Keep full access. It's not locked away
- •Better than HISA for mortgage holders
Smart Offset Strategy:
- Park emergency fund in offset
- Pay high-interest debts first still
- Build offset instead of overpaying mortgage
- Maintain flexibility for opportunities
Calculate Your Debt Payoff Plan
Enter your debts below and compare Avalanche vs Snowball methods. See exactly how much you'll save and how long each strategy takes.
Compare Debt Payoff Strategies
Your Debts
Total Monthly Payment
$1,000
Minimum payments: $500 • Extra: $500
Foundations - Debt: Complete
- Good debt (low interest, builds assets) can accelerate wealth. Bad debt (high interest, funds consumption) destroys it.
- Prioritise by interest rate: eliminate high-interest debt first (credit cards, personal loans) while keeping good debt like mortgages.
- Use offset accounts strategically. Every dollar in offset saves you your mortgage interest rate tax-free.
Homework
List all your debts with their interest rates. Which ones are helping you build wealth, and which ones are costing you? What's your priority order?
Use the Debt Payoff Calculator above to create your elimination plan. If you have credit card debt, commit to paying it off this year. Set up automatic payments to your highest-interest debt starting next pay cycle.
What's Next?
30 minutes