Our financial affairs generally become more complex as we get older and it’s not uncommon for debt to follow us into our retirement years. By avoiding common debt traps we can access the secrets of creating positive cash flow and have the wherewithal to build a healthy retirement nest egg.

1. Too much home loan

The great Australian dream is home ownership. Plunging into the property market is a ‘feel good’ exercise. Homeowners want the security of owning their own home outright and over the years watch it increase in value.

The trap is, too many property purchasers get carried away and tend to buy too much house for their budget. It’s easy to get carried away when buying residential property and most of us also subconsciously try to keep up with the Jones’s. Banks will also allow borrowers to stretch their borrowing capacity to what appears to be within the borrower’s means. However, most borrowers don’t bother, or forget to factor in potential interest rate increases or the loss of employment.

The tip is to borrow well below your borrowing capacity limit. This frees up cash flow to enable making extra repayments into the mortgage. The amount owing gets reduced much faster and along with capital gains will create equity quicker.

Paying of the home loan faster keeps debt at manageable levels allowing an investment portfolio to be started sooner than later.

2. Winging it purchases

We all make impulsive decisions, we see something we have to have and get a rush of blood to our heads and nothing is going to stop us until we possess whatever it is that we’re fixated on. It could be lap tops for the kids at school, a new car, clothing, furniture etc. On the other hand, there is no money in the bank account, it’s empty. In this day and age personal loans and credit cards can help us bridge these cash flow gaps; nonetheless they should always be used in moderation.

3. Credit abuse

Credit cards are almost a must have item in your wallet these days, especially if you want to travel or go on holiday. It’s almost impossible to book a hotel or rental car without one. They can also be very convenient when we go grocery shopping, buy petrol or we run across that summer sale that presents the irresistible bargain.

Most, if not all credit cards have an interest free period, so as long as the full accrued balance is paid off by the end of the interest free period, then any potential interest charges can be avoided.

Having said that, there are inherent risks associated with credit cards as it’s so easy to give into impulse purchases. Avoid the mind set of thinking you are carrying free money around in your wallet. As the advertisement always says at the end, ‘gamble responsibly’.