Tips for Managing Debt While Building Wealth

Managing debt while growing wealth requires smart financial planning. Many Australians struggle with debt, but with the right strategies, they can pay it off efficiently while securing their financial future. 

Whether you have a mortgage, personal loan, or credit card debt, making informed choices that will lead to long-term financial security is essential.

This article provides practical tips to help you manage debt effectively while building wealth in 2025, considering current Australian financial regulations and best practices.

Let’s Get Straight to the Point

For those short on time, here’s a quick summary of how to manage debt while building wealth:

• Automate savings – Set up direct deposits into a savings or investment account.
• Cut unnecessary expenses – Differentiate between needs and wants to free up money for debt repayment.
• Pay off loans faster – Make extra mortgage or personal loan payments to reduce interest costs.
• Use a zero-based budget – Assign every dollar a role before getting paid.
• Invest wisely – Even with debt, investing for retirement or property can be beneficial in the long run.
• Diversify investments – Don’t put all your money into one asset class—spread the risk.

Now, let’s break these down into actionable steps.

1. Automate Your Savings and Debt Repayments

Set Up Direct Transfers

The most effective way to ensure financial discipline is to make saving and debt repayments automatic.

Many Australians struggle with spending first and saving last, leading to inconsistent savings habits. Setting up automatic transfers can help you prioritise your future financial well-being.

For example, you can:

• Set up a direct debit to move 10% of your salary into a high-interest savings account every payday.
• Use a separate bank account with limited withdrawal access to avoid temptation.
• Automate transfers to your mortgage offset account to reduce interest charges.

Use Round-Up Features on Bank Apps

Australian banks like CommBank, Westpac, and ING offer round-up savings features. These feature purchases are rounded up to the nearest dollar, and the difference goes into savings.

For example, if you buy a coffee for $4.60, the app rounds it up to $5, and the $0.40 difference is saved automatically. Small amounts accumulate into hundreds or even thousands of dollars annually.

Make Automatic Debt Payments

Missing loan payments can result in late fees and higher interest rates, damaging your credit score. A bad credit history can make future loans expensive or unavailable.

To avoid this:

• Set up direct debit repayments for your mortgage, credit cards, and personal loans.
• Schedule payments before the due date to avoid delays in processing times.
• Keep a buffer in your transaction account to cover unexpected expenses.

2. Identify and Cut Unnecessary Spending

Differentiate Between Needs and Wants

Many Australians spend a significant portion of their income on non-essential expenses, often without realising it.

Consider these statistics:

• The average Australian spends $2,000 annually on coffee and takeaway lunches.
• Streaming services cost Australians an average of $45 per month ($540 per year).
• Impulse shopping accounts for 30% of monthly discretionary spending.

If you’re struggling to reduce debt, take a hard look at your spending habits and ask yourself:

• Do I need to eat out every week, or can I cook at home more often?
• Is that gym membership really necessary, or can I switch to outdoor workouts?

Track Your Expenses

A great way to control your finances is by tracking every expense. There are free budgeting apps like:

• MoneySmart Budget Planner – Provided by the Australian Government.
• Frollo – A great tool for analysing spending patterns.
• Pocketbook – Helps categorise expenses and identify overspending.

3. Reduce Debt Faster with Extra Payments

Make an Extra Mortgage Payment Each Year

In Australia, mortgage interest rates have increased in 2025, making loan repayments a major expense.

By making just one extra mortgage payment annually, you can:

• Shorten a 30-year home loan by up to 5 years.
• Save tens of thousands of dollars in interest.

For example, with a $500,000 mortgage at 5.2% interest:

• Paying one extra monthly instalment per year saves over $80,000 in interest.

Prioritise High-Interest Debt

• Credit card debt in Australia has interest rates ranging from 19% to 22%, making it one of the most expensive debts.
• If you carry a $5,000 credit card balance at 20% interest, the minimum repayment takes 10+ years to clear!

The best approach is the debt avalanche method:

1. Pay off the highest-interest debt first (usually credit cards).
2. Then move to personal loans, car loans, and mortgages.
3. Keep making minimum payments on all debts while directing extra funds to the highest-interest one.

Consider Debt Consolidation

If you have multiple debts, you may benefit from a debt consolidation loan or balance transfer credit card:

• Debt consolidation: Combines multiple debts into one loan with a lower interest rate.
• Balance transfer credit cards: Offer 0% interest for 12-24 months, giving you time to clear credit card debt faster.

4. Create a Zero-Based Budget

What is a Zero-Based Budget?

A zero-based budget means every dollar you earn is allocated before you get paid. This prevents overspending and ensures you are paying debts and saving consistently.

How to Set One Up

1. List all your income – Include your salary, side gigs, and government benefits.
2. Categorise expenses – Rent, groceries, transport, loans, utilities.
3. Set aside money for debt repayment and savings.
4. Ensure total expenses equal your income (zero balance).

5. Invest Even While Paying Off Debt

Investing while repaying debt can grow wealth faster, especially if investment returns exceed loan interest rates.

Why Investing is Important

• Stock market returns average 7-9%, often higher than mortgage rates.
• Superannuation is tax-advantaged and boosted by employer contributions.
• Compounding interest grows investments over time, even with small contributions.

Example: A $10,000 investment at 8% growth becomes $21,589 in 10 years.

When to Prioritise Investing

• If your loan interest is under 5%, investing may provide better returns.
• If you have an emergency fund, investing won’t put you at risk.
• If making minimum loan payments, extra cash can work for you through investments.

6. Diversify Investments to Reduce Risk

Spreading investments across shares, bonds, and property helps reduce risk and build steady wealth.

Shares & ETFs – High Growth Potential

• ASX 200 ETFs offer broad market exposure with low fees.
• Historical returns of 7-9% annually beat inflation.
• Dividends provide passive income.

Example: A $5,000 ETF investment at 8% growth doubles in 9 years.

Bonds – Low-Risk Stability

• Government bonds are highly secure.
• Corporate bonds offer higher returns with some risk.
• Fixed interest payments provide steady income.

Example: A $10,000 bond at 4.5% interest earns $450 annually.

Investment Property – Passive Income & Growth

• Rental income offsets mortgage repayments.
• Capital growth builds wealth over time.
• Tax benefits like negative gearing reduce costs.

Example: A $500,000 property rented at $600/week earns $31,200 annually.

7. Supercharge Your Superannuation

Salary Sacrifice – Pay Less Tax, Save More

Contributing extra pre-tax income to super lowers your taxable income and grows your retirement fund faster.

• Taxed at just 15%, lower than most income tax rates.
• Reduces taxable income, meaning lower tax bills.
• Small contributions compound over time, boosting retirement savings.

Example: Salary sacrificing $5,000 annually saves around $1,475 in tax and grows your super balance.

Government Co-Contributions – Free Super Boost

If you earn under $43,445 (2025 limit), the government matches 50% of your voluntary after-tax super contributions up to $500 annually.

• Earn between $43,445 and $58,445? You may still get a partial bonus.
• No paperwork needed—the ATO deposits it automatically.

Example: Contribute $1,000 after tax, and the government adds $500 free to your super.

Even small extra contributions can greatly improve retirement savings while staying on top of your finances.

8. Protect Your Wealth with Insurance

Income Protection Insurance – Secure Your Earnings

Your income is your biggest asset. If illness or injury prevents you from working, income protection covers up to 75% of your salary so you can keep paying expenses.

• Covers mortgage, rent, utilities, and daily costs.
• Available for short-term (2 years) or long-term (until retirement).
• Tax-deductible premiums reduce taxable income.

Example: If you earn $80,000 annually, insurance could provide $60,000 annually if you can't work.

Health Insurance – Avoid Costly Medical Bills

Private health cover helps with hospital stays, surgeries, and specialist treatments, reducing out-of-pocket costs and avoiding long wait times.

• Covers physiotherapy, dental, and optical services.
• Helps avoid the Medicare Levy Surcharge (applies if earning over $93,000).

Example: A $15,000 knee surgery in a private hospital could be covered, preventing financial strain.

Life Insurance – Financial Security for Your Family

If you have dependents, life insurance ensures they’re financially protected if you pass away.

• Provides a lump sum to cover mortgage, debts, and living expenses.
• Some policies include Total & Permanent Disability (TPD) cover.

Example: A $400,000 life insurance payout could clear a mortgage, preventing financial hardship for your family.

Why Insurance is Essential

• Prevents financial setbacks by covering expenses during crises.
• Protects investments so you don’t have to sell assets in an emergency.
• Provides peace of mind knowing debts won’t burden your family.

While insurance adds a cost, it protects your financial future, making it a key part of debt management and wealth building.

Conclusion

By following these strategies, Australians can reduce financial stress, improve their savings, and build long-term wealth while managing their debts.

The key to financial success is taking action today.