Debt…what an ugly word

Chances are, you’re likely paying off some form of debt. And if you air that grievance to nearly anyone – you’ll likely find a sympathetic ear as nearly 75% of Australians carry debt. This could come in the form of a student loan, mortgage or credit cards.

Not all debt is bad. Debt can often be thought of as ‘good debt’ and ‘bad debt’. Good debt will come about when you borrow money for the purpose of buying an asset that is expected to increase in value or bring in further income. Bad debt on the other hand would likely have arisen due to spending that will not further your financial position.

Examples of bad debt include; credit cards, store cards, personal loans, paydown loans and other forms of high interest debt.

With interest rates in Australia at record low levels, the important question for Australian expats and residents today is whether to shift spare funds to pay down your mortgage, or to invest in the stock market.

There is no one-size-fits-all response to such a question, so let’s consider what factors will influence the decision.

What factors influence the decision?

It will depend on how much debt you have relative to your income and personal balance sheet, as well as the interest rates that apply to your existing debt.

Let’s consider a hypothetical scenario to diversify your extra savings:

  • you could allocate 20% of your take-home income towards future you. This could go towards:
    • savings
    • investing
    • paying off debt
  • for any debt with a higher interest rate (above 5% or so) you may be best focusing on paying this off before investing or saving. This will likely be your credit cards. If you have existing savings, use this to pay down your high interest debt (you’ll likely be better off in the long term).
  • you focus your efforts on investing once you’ve paid off debt with high interest rates and set up an emergency fund.

But why shouldn’t I pay off all my debt?

Let’s consider why you may not want to do so.

It’s all about the interest rate.

Credit cards, for example, on average can come with an average interest rate of 12.00% to 20.00%. On the other hand, HECS (Higher Education Contribution Scheme) or HELP debt in Australia is effectively an interest-free loan and indexed to the Consumer Price Index (CPI) (which does mean the amount goes up every year but no more than inflation (which has a target of 2 – 3%) and you are forced to repay the loan once you reach an income threshold.

As you can see, that’s a significant range in the interest rate that applies for what you could be paying on your debt.

As for investing in the stock market, the interest, or returns generated, historically has provided investors with positive returns and the returns that investments generate will typically fall somewhere in the middle of the interest owed on HECS and credit card debt, at least that’s been the case for the Australian stock market over time.

The Australian stock market has had a long-term positive return of 8 – 12% over the past few decades, although some years it’s more and some years it’s less and others it’s negative, but that has been the trend historically. When it comes to investing in the stock market, it’s important to be aware of how much your portfolio could fall in the event of a downturn, not just the average expected return.

For many people, a sensible starting point is to use extra cash to first pay off debt that has interest rate greater than 5%, but if you have debt that is carrying an interest rate of less than 5% a sensible option may be making minimum repayments and investing the surplus cash.

Why is 5% selected?

This is not a one-size-fits-all approach, but rather a general rule of thumb. We believe this is a reasonable benchmark to draw the line between average interest rate of debt and average returns generated by the stock market.

Another strategy that can be employed is the “Debt Recycling” strategy, which basically involves turning that ‘Bad Debt’ to ‘Good Debt’. This is a more complex strategy utilising the tax benefits available for Australians it making the most of their income and asset base.

At the end of the day, any money you’re putting towards debt or investing is typically going to be a step in the right direction. Our team at Ally Wealth Management can work with you to crunch the numbers and ensure that you’re making an informed decision and deploying your surplus cash in the right direction.


A plan is only effective if you act on it.


Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.