Alan Clarke: Research best way to beat debt

Concentrate on growing your career and income before you buy a house.

I spotted a useful article by CNNMoney website contributor Mohammad Majd in December:

"When I graduated from university in 2009, I was 23 and had US$200 [$273] in my bank account. In other words, I was like most American college students -- poor and in debt -- although better off than many with a student loan of only $55,000 [thanks to grants and scholarships]. When I started work, my monthly student loan payments came to $460 and my engineering salary was $48,000 so I was better off than some. My payments were inconvenient but still manageable.

"I maintained the same modest lifestyle I had while I was a student. I began attacking my student loans by making double and triple payments. Like a lot of other recent graduates, I was conditioned to fear debt and so I started reading a lot about the 2009 crisis and about economics in general.

"One important question emerged -- why am I rushing to pay off loans with around 6 per cent interest when the S&P 500 share market index has historically returned 11 per cent? I decided to revert to paying the minimum on my student loan and invest the surplus instead.

"I was very much a novice investor, but I started investing monthly when a lot of other people were discouraged from investing at all [in 2009 and 2010]. Consequently, I was investing when shares were cheap. When I turned 26, I noticed something astonishing. My student loan debt and the money in my investment account had converged to the same amount -- $35,000.

"It was a really good feeling knowing that I could wipe away my entire student loan debt with just a few mouse clicks. I could have but I didn't. I continued to pay the minimum student loan payments and kept adding to (and growing) my investments.

"Today, I am well on my way to paying down my student debt, but I also have tens of thousands in stock market gains."

THERE ARE LOTS OF IDEAS HERE

First of all, this young man did some study of money, which too many of us don't, because money just seems too hard.

Secondly, he wasn't worrying about buying a first home at all -- he was paying attention to his student loan -- debt -- and options to get rid of it faster.

Thirdly, he recognised that you can buy shares monthly and they can offer good returns.

You can not buy a house with no deposit and with a student loan, but you can invest small sums monthly into shares.

He invested in gloom -- when shares were cheaper.

Kind of the opposite of buying a house in Auckland right now.

He did have an advantage of living in a country where house-price madness is largely absent, so he did not get distracted from his programme.

But, the knowledge he gained (which you could too) will stand him in excellent stead later on.

LIMITATIONS

Of course, not everyone has surplus income to invest into shares in their first job.

And markets are not often as low as they were in 2009 and 2010, which was an excellent time to invest. And not all of us have the "stickability" that he obviously had.

However, in summary from last week and a recap from earlier, these pointers can help you get on your way:

* Concentrate on growing your career and income before you buy a house.

* Do the maths on your student loan.

* Before you buy a house, remember house prices don't automatically rise in all towns in New Zealand.

* Do the sums on your proposed mortgage payments.

* If you can earn an extra $100 a week and put that on to your mortgage, what are the savings/rewards you can make? You should know these figures before borrowing even $1.

Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle, is available at acfs.co.nz

Alan is an independent authorised financial adviser (AFA) FSP26532; his disclosure statement is available on request and free of charge.