Tackle Debt

Not all debt is created equal. A home loan on an appreciating house is fundamentally different from a 24% credit card balance. Before you invest aggressively, you need to deal with the expensive stuff.

The simple rule: if the interest rate on your debt is higher than what you’d reasonably expect to earn by investing (~7-8% a year, a common long-run assumption for shares (as at Oct 2026)), pay it off first. That’s a guaranteed return.

Good Debt vs Expensive Debt

Type	Example
Low-cost / “good” debt	Home loan
Medium-cost debt	Some car loans
Expensive / “bad” debt	Credit cards, payday loans, personal loans

Compare the interest rate on each debt with the rule above. Rates change with the cash rate, so check what you’re actually paying.

Interest on the home you live in is not tax deductible in Australia or New Zealand. Only the part of a loan used to earn income, such as a rental property, can be.

Expensive debt is a financial emergency. A credit card at, for example, 24% p.a. means every $1,000 you carry costs you $240 a year in interest. No investment reliably returns 24%. Paying off that card is the best investment you can make.

The Order: Cash Cushion First

Before you throw every spare dollar at debt:

1. Build Tier 1 of your cash cushion first — at least 1 month of expenses in your everyday account.
2. Keep making minimum payments on everything — never miss a minimum payment.
3. Then attack the debt — with any money above minimums, use one of the strategies below.

Two Strategies: Avalanche vs Snowball

There are two well-known approaches to paying off multiple debts. Both work. The “best” one is whichever you’ll actually stick with.

Avalanche Method (Lowest Total Cost)

Pay minimums on everything, then put all extra money towards the debt with the highest interest rate. When that’s paid off, roll the payment to the next highest rate.

Best for: People who are motivated by maths and logic.

Snowball Method (Fastest Wins)

Pay minimums on everything, then put all extra money towards the debt with the smallest balance. When that’s paid off, roll the payment to the next smallest balance.

Best for: People who need visible progress to stay motivated.

Try It: Compare Your Debts

Debt Payoff Comparison

Name Balance Rate Minimum

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+ Add debt

Extra monthly payment

Avalanche

Highest rate first — saves the most money

23 months

$2,401 in interest

Snowball

Smallest balance first — faster psychological wins

23 months

$2,789 in interest

Avalanche saves $388 more in interest.

But the snowball gives faster wins — pick what fits your psychology.

When to Pay Debt vs Invest

Debt interest rate	What to do
Above 8%	Pay it off before investing (beyond your employer super or default KiwiSaver contributions)
5-8%	Judgment call — consider splitting extra money 50/50
Below 5%	Generally fine to invest while making payments

In Australia, your employer’s Super Guarantee is paid regardless, but it’s usually better to clear expensive debt before you salary sacrifice extra into super. In New Zealand, keep contributing to KiwiSaver at least at the default rate, regardless of debt. Your employer’s contribution and the government’s 25c per $1 (from 1 Jul 2025) are an instant return that no debt costs.

Your Debt-to-Income Ratio

In Australia and New Zealand, debt-to-income (DTI) usually means your total debt as a multiple of your gross yearly income:

DTI = Total debt ÷ Gross yearly income

For example, $540,000 of debt on a $90,000 income is a DTI of 6. Regulators limit how much lending banks can do at high DTIs:

Country	Limit on banks
Australia	At most 20% of new home lending at a DTI of 6 or more (from 1 Feb 2026, APRA). Banks also test that you could afford repayments at 3 percentage points above your loan rate (as at Oct 2026)
New Zealand	At most 20% of owner-occupier lending at a DTI over 6, and 20% of investor lending at a DTI over 7 (from 1 Jul 2024, RBNZ)

A high DTI doesn’t automatically mean you’ll be refused, but it leaves less room if rates rise or your income falls.