Aussies in the red: how to prevent a financial disaster

New data released by the Australian Financial Security Authority has shown a 2 per cent increase in the amount of personal insolvencies around the nation.

This figure equates to more than 7,000 Australians and includes bankruptcies, debt agreements and personal insolvency agreements.

The data overall showed a worrying trend, that Aussies are going broke at the fastest rate recorded since the 2008 global financial crisis. Queensland and Western Australia accounted for the majority of the national rise with the amount of debt agreements in Western Australia reaching the highest recorded level in history. For these two states, coming down off the high that was the mining boom, there is an uncertain future ahead. 

The insolvency data comes out at a time when credit card debt levels have reached a 12 month high at over $33 billion, suggesting a worrying national trend of Aussies biting off more than they can chew. While the picture seems grim for those that are doing it tough there are some basic personal finance principles that can help to keep heads above water in financial emergencies.

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Having an emergency fun

Keeping a few thousand dollars in a high interest savings account that is untouchable except for in emergencies will give you a nice buffer to stop a financial set back turning into a disaster. If you can, aim for around $5000 which you can save up to little by little by making weekly contributions. Once you have that money in there it will continue earning interest, ready for a time when you may need it. An emergency fund can mean the difference between a car breakdown being a mild inconvenience or ending in a mortgage default.

Not relying on credit cards

Living within your means wherever possible is can prevent you from falling into a debt cycle that ends in insolvency. While it has become quite normal in Australia to use our credit cards for every purchase this becomes a problem when you’re using it for items that you wouldn’t otherwise be able to afford. If you don’t trust yourself to be able to live within your means without racking up a debt on your plastic it may be time to cut it up. Not having a credit card is the quickest way to remove all temptation to live your life in debt.

Building a buffer into your mortgage

Building a buffer into your mortgage refers to making extra repayments when times are good so you have some equity to rely on when times are not so good. By contributing a little extra each month, or making a lump sum repayment when you receive an unexpected bonus, you add to your fund of money that you can draw down on in times of need. This won’t be the case for everyone with a mortgage as it largely depends on if you have access to a redraw facility and the ability to make extra repayments. But if it is something you are able to do then think of it as a win win – by paying down your principal faster you are decreasing the amount of overall interest you have to pay on your loan while also saving for emergency situations. 

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