Chronos Private

How much debt should you have?

When it comes to personal financial advice, generally there are no hard and fast rules for answering questions like the one I’ve posed in this discussion.  However, in this case I would be confident to say that the answer to this question is you should not have nearly as much as the banks are willing to lend to you unless you have a sound long-term plan in place.  Banks simply look at your ability to ‘service’ the loan (i.e. make repayments on time) – this is important but what’s more important is your ability to repay the loan in a timeframe which is reasonable and means you pay as little interest as possible.

Remember, a loan is never a good thing for you unless you are able to pay it off without incurring any interest.  The banks are like a casino, they never lose, so their priorities are generally not linked to your own.  As such, when trying to identify how much debt is the right amount for you it’s crucial you analyse this in the context of your personal, very specific goals and objectives.  At a high level, you should be thinking about the following issues:

  • What is the reason for taking out a loan?
  • Is negative gearing your primary reason for looking at debt?
  • What is the timeframe around when you would like to have it fully repaid?
  • How are you planning on paying this loan off?
  • Is the amount you are borrowing sustainable across different market environments?
  • Repayment frequency versus cash-flow to maintain lifestyle.
  • Fixed rate versus variable rate versus both – what is best for you?



Part of my ‘kit bag’ is a tool which I refer to as a ‘Lifelong Cash-Flow Model’ – basically this allows me to project into the future based on a number of different assumptions to help provide clarity around decisions being made today.  Nobody has a crystal ball but a tool such as this helps put the odds back in your favour when it comes to making successful financial decisions.

For example, I was working with a couple recently where we used this tool to help show them how much debt they may have in 10 years time based on their goals.  This was a great way to open their eyes to the sacrifices they will need to make in order to achieve these objectives and really helped them understand what they needed to do from that day onwards to achieve their success.  For them, it meant they brought forward a home downsize to free up capital and reduce their mortgage – this allowed Mum to not have to rush back to work sooner than they desired.

As I said earlier, a bank will simply assess whether you can ‘service’ the loan they are giving you whereas you should aim higher – don’t just try to service it, make sure you can actually pay it off in a reasonable timeframe.  The less interest you can pay the better but if you are going to enter into a debt agreement it’s important you make sure it’s truly necessary and that once the loan has been repaid you are in a better position than if you hadn’t borrowed the money.  Sometimes this means living in the suburb of your dreams and other times it means making a profit.  Whatever the answer though think about debt in the context of your goals and do not let the banks’ objectives get in the way of your own.