Before attempting to build up your assets, you need to be clear about what you owe, writes Alex Berlee.

Today debt is a way for life, with the average household owing nearly 1.8 times its annual disposable income, and the average person about $80,000 in debt.

But debt doesn’t have to be a dirty word. The right kind of debt can be helpful. . It’s a simple concept: good debt can create wealth and bad debt reduces it.

If you borrow to invest, and the investment earns money, debts can be paid off from the earnings. In this way, the debt is y working for you. That’s good debt.

But if you borrow for a car, or use a credit card to buy things that lose value and don’t earn money, you can be behind in two ways – you’re left with something that has a lower capital value, while having to afford interest payments. This is bad debt.

If you’re trying to win the battle against debt, you should consider paying out any non-deductible debt first, such as credit cards, personal loans and home mortgages. It’s important to reward yourself for your hard work, but if you receive a lump sum of money, say from a tax return or a bonus at work, you’ll probably be better off in the long term by using it to pay off any non-deductible debt.

Managing debt doesn’t stop when you retire. One of the biggest changes to retirement in recent years is people’s attitude about taking debt into their golden years.

This is not such a problem if we’re talking about good debt, but bad debt can eat into super or retirement income. In the lead-up to retirement, look at how long it’s going to take to clear your debts and stick to a plan.

You might also consider going slow on the mortgage in order to crank up salary sacrifice into super and then use some of the extra super at retirement to clear the mortgage. You’re ultimately paying off the mortgage at retirement with low-tax dollars, via your super.

Retirees should think carefully before going guarantor for their children. This can seem like a great way of helping them make a start, but be aware of the risks, especially if they lose their jobs or get in over their heads.

Before attempting to build up your assets, you need to be clear about what you owe – how much, in what form and at what interest rate. Once you know this, you can work out whether your debt could be arranged more efficiently.

If you have several bank accounts and credit cards, consider consolidating them, which will help to reduce fees and charges, and make it easier to track spending.

Think about rolling any non-deductible debt into your home loan as this will usually have the lower interest rate.

Arranging for income to be paid directly into a home loan and using a credit card for daily purchases can help make considerable savings on interest payments. Of course, this will only work if you pay off your credit card debt each month.

Without a budget, there’s no way of knowing how much is left at the end of the week to save, invest or go toward reducing debt.

Make it easy on yourself by setting up an automatic spending plan – pay your debts down first, allow an amount for larger short-term expenses like holidays, then spend what’s left (avoiding credit cards), rather than spending first and trying to reduce debt later.

Posted by Alex Berlee – Sydney Morning Herald on 6th May, 2015