⏱️20 min

FOUNDATIONS · STEP 4 OF 4

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 cars, furniture, weddings, 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

If your debt interest rate is higher than what you can reliably earn investing, pay off the debt first. A guaranteed 20% return (by paying off a credit card) beats a risky 10% investment return every time.

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:

Saves the most money in interest

Fastest path to debt-free (by time)

Mathematically superior strategy

Cons:

Can feel slow if highest-rate debt is large

Requires discipline without quick wins

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:

Quick wins create motivation

See accounts close—tangible progress

Easier to stick with long-term

Cons:

Pays more interest overall

Takes longer to eliminate all debt

Best for: People who need momentum and psychological wins to stay motivated.

Adrian's View

The best method is the one you'll stick with. If interest rate differences are huge (e.g., 20% credit card vs 6% car loan), Avalanche is clearly better. But if rates are similar, Snowball's motivational boost can be worth the small extra cost.

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

HECS is indexed on 1 June each year based on CPI. If you want to avoid indexation, pay it off before 1 June. But remember—this only makes sense if you have no other debt and surplus cash sitting around.

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

Debt Name

Balance ($)

Interest Rate (%)

Min Payment ($)

Debt Name

Balance ($)

Interest Rate (%)

Min Payment ($)

Extra Monthly Payment (above minimums)

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

Reflect

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?

Action

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