If you want to build a house – a house that can survive rain, wind, heat and maybe even the odd earthquake – you need to start with strong, solid foundations. That way, when any of these disasters occur, your house will remain standing and any damage won’t be too serious. Building financial stability in your life is very similar.

So, what should your top priorities be when it comes to laying the foundations for your personal financial security? Save first? Invest first? Pay off loans first? Figuring it out can be very overwhelming – but the good news is that I’m going to explain it right now!

The goals that you’ve set for yourself and the $1000 Project will always be your number one focus, of course. Having goals that matter to you and that give you purpose and direction is essential to your happiness and energy for this journey, as I’ve said before. However, as a licensed financial planner, I feel that it’s my responsibility to give you some valuable insight and education into the best ways to use the $1000 Project to create long-term financial freedom. This way, you’ll be able to make an educated decision about what’s best for you and your future, and you’ll feel even more in control and in tune with your vision.

When you realise how helpful these suggestions could be for you and the ways in which they could increase your financial wellbeing, you may want to add some of them to your list of goals. I want you to be aware of all the great things you can achieve from the $1000 Project, so that you can pick and choose what works for you, your needs, your values and your motivation.

I really believe that the first and most important step is to reduce or even completely wipe out toxic debt in your life. Toxic debt is debt that doesn’t provide you with any tax deductions, passive income or growth. You can build up this type of debt with, for example, credit cards, car loans, personal loans, student loans (to be explained) and home loans.

Healthy debt, on the other hand, is money that you borrow to do beneficial things, such as to purchase shares, investment properties, businesses or managed funds. These are things that help build your wealth over the long term, providing you with passive income streams and/or capital growth opportunities, as well as some tax deductions along the way.

Generally speaking, if you borrow money to purchase something that generates an income, such as an investment property which you rent out, you can claim the cost of borrowing the money (i.e. the interest) off the income that you receive.

Debt most definitely has its place in our society, and rightly so – without it we wouldn’t be able to buy things like homes and investments. But the issue is the amount of debt, what it’s used for, and how strongly you focus on actually paying it off.

Ideally, you want no toxic debt and some healthy debt. So, if you’re wondering how to get the best financial benefit from doing the $1000 Project and you have toxic debt, a good goal would be to reduce your debt to a more manageable level, or even to pay it off for good.

It can be hard to know what your priorities should be in debt reduction, though. With this in mind, I’m going to outline the different types of debt, from the worst to the least worst, and explain why each is bad and why you need to pay it off. And, most importantly, I’ll look at how realistic it is to pay debt off quickly if you put your mind to it. Once you’ve managed to move off the debt repayment treadmill, you can turn your mind to creating more wealth and stability for yourself!

PRIORITY 1: CREDIT CARD DEBT

The worst type of debt to have is credit card debt, when you owe money on a credit card that is never or rarely paid off in full when it’s due. It has the highest interest rate charge (of up to 22% p.a.), and it’s damaging to your credit rating – and to your headspace.

Your credit rating is a number that tells financial institutions how reliable you are with money, particularly borrowing money (kind of like a report card from school). If you have credit card debt, or even worse, multiple credit card debts, it will negatively affect your credit rating. The lower your credit rating, the harder it will be to borrow money, which could damage your ability to achieve major life goals such as one day buying a home, starting up a new business or investing.

You can find your credit rating relatively easily and quickly online for free. There are plenty of websites that do this for you, but you need to be careful that they don’t sell your information on. I recommend sticking to one of the three credit reporting bodies in Australia. If you discover that your rating is low, don’t despair: you can rebuild it by taking control of your debt and paying it off as quickly as possible, and by monitoring the amount of credit that you draw on and have access to.

Even if you’re paying an interest rate much lower than 22% p.a., this interest is still not tax deductible, and it definitely doesn’t provide you with any passive income or with capital growth. Most people who carry this kind of debt don’t have much to show for it.

Say that you have $10 000 owing on your credit card and the card has a special interest rate of 12% p.a. Each year, you’re wasting over $1200 in interest, which you have to pay with your after-tax earnings. So, depending on your marginal tax rate, you may have to earn $2000 before tax before you can afford to service the interest – and you still haven’t paid off any of the principal loan.

The other reason why credit card debt is so bad, beyond the excessive interest rate cost, is that it affects your attitude. Often when I coach people out of debt, they have to get past huge amounts of negative emotions such as guilt, remorse, embarrassment, shame, even disgust. Carrying around these feelings every day isn’t good for you or your mental health. And when you’re in this kind of debt, it’s common to have the disheartened, self-destructive view of, ‘Well, I’m already in debt, what does it matter if I buy this dress, laptop, holiday . . .?’ Then up goes the debt again. It can become so overwhelming and self-perpetuating that you don’t even know where to start to get back in control again.

It’s really easy and fast to rack up credit card debt. You might buy a $500 item on a credit card and not give it much thought – but that $500, after tax, might have taken you a couple of days to earn. Yet you spent it so quickly and without much consideration.

The process of using a credit card is a reasonably mindless activity, and so your value system often isn’t switched on. As I mentioned in chapter five, the swiping or tapping of a card doesn’t make as much impact on you as paying for things in cash, where you feel the full experience of giving away your money. The latter makes you a lot more alert to whether you really value what you’re buying, and what you’re giving up.

If you’re drowning in debt, it doesn’t have to be this way. You can use the $1000 Project to help you get out of debt, with each parcel of $1000 that you can throw at it.

And, to be brutally honest, the longer it takes for you to get out of this type of debt, the bigger the lesson that you needed to learn – and, hopefully, the less likely it will be that you’ll return to using a credit card so flippantly. Having to go through this big change will create a conscious shift and give you a new appreciation for using money in a more mindful manner.

This is why I’m a little hesitant to recommend that people take out a personal loan to consolidate credit card debt, unless some internal work has been done to stop the excessive use of a credit card and bad habits have been put to rest. Time and time again, I have seen people take out a loan to pay off a painful debt that they’ve been carrying for a while, with the best intention of sticking to their repayment plan, only to find themselves soon using a credit card again. Then, twelve months later, the total debt has doubled.

If you’re using credit cards mindlessly or thoughtlessly, or as an emotional Band-Aid, please take the time while doing the $1000 Project to tackle and break this habit. It’ll be extra helpful if you can gain insight into why you do this. What are the triggers to watch out for, and what solutions or strategies do you need to empower yourself to move toward a more positive headspace?

So, if you want to use the $1000 Project to rebuild your financial future, start with paying down your credit card debt, and make a lifetime promise to yourself that you will watch what you spend and pay off your card in full every month – or that you will not have a card and will only pay for things in cash.

Sometimes, after paying off stressful amounts of credit card debt, people find that they would much prefer never to have the temptation of a credit card in their possession. They realise that they’re financially and mentally better off only paying for things in cash or with their debit card. This leaves them more conscious of their budget and cash flow, as they know they have to make their money last until the end of their pay cycle.

If you are one of these people, have a think about setting a goal to get out of credit card dependency as soon as possible. Learn from your old bad habits and promise yourself that this spending behaviour will die a quick death. You can replace it with a wiser and more empowered practice.

PRIORITY 2: PERSONAL LOANS AND CAR LOANS

Personal and car loans can be just as toxic as credit card debt, but the interest rate is usually lower, which is why I’ve rated them second in my list of suggested priorities.

Typically, these types of loans are taken out to help consolidate credit card debt, or to pay for a lifestyle asset such as a car or a holiday or other depreciating assets. Either way they still tick all three boxes for a toxic debt label: high interest rates, a negative impact on your ability to borrow money until the debt is paid off, and harmful to your financial attitude. (Occasionally you can claim some of the interest from a car loan, but only for travel for work.)

And, as with credit cards, these types of loan mean that you’re paying (plus more with the interest) for something that you purchased ages ago and might not even be still enjoying. With an expensive holiday, for example, the effect of it will fade in your memory while the financial pain and cash flow drag continues on.

If you have this kind of debt, you can use the $1000 Project to clear it sooner and save on interest. This will clear the path for you to move on to other, more positive areas in your finances, and those monthly repayments will stay in your pocket to spend as you wish.

Say that you have a car loan of $30 000, with an interest rate of 14% p.a. on a five-year term. Your monthly repayments would be just under $700 per month. If you can come up with even three parcels of $1000 each year to pay towards the loan, you could have your loan paid off more than a year and a half sooner, saving over $4000 in interest.

So if you have a personal loan or car loan, it’s definitely worth considering paying this off as one of your goals for the $1000 Project.

PRIORITY 3: STUDENT LOANS AND HECS-HELP DEBT

If you never spend a second thinking about, let alone worrying about, your HECS-HELP debt or student loans, I wouldn’t blame you in the slightest. These loans are automatically approved, you rarely get an update as to how much you owe and how long it will take to be paid off, and the loan appears to be interest-free. So having a complacent attitude is only natural. And investing in your education (even via a loan) is one of the best investments you can make, as it increases your value and your purpose in the world.

However, it’s not all good news for this kind of debt . . . Firstly, these loans are indexed. This means that if you have a student loan debt of $30 000 and the nominal inflation rate of 3% is applied, then the loan will grow by $900 after twelve months. So you need to spend $900 of your after-tax earnings every year just to stop that debt from getting any bigger. And as you probably already know, the bigger the debt, the more challenging it is to pay off.

Secondly, if you earn over a certain amount (currently a little over $55 000 p.a.), your employer will automatically be taking repayments out of your pay as per the Australian Taxation Office’s instructions. But as the compulsory repayment rate is between 4 and 8% of your pay, depending on your salary, it will take the average person ten years to pay off their HECS-HELP debt.

Ten years is a long time to be held back financially. Throwing parcels of $1000 towards your HECS debt (ideally before 1 June every year, which is when they apply the index) will dramatically speed up the extinguishing of this debt.

Also, your student debt or HECS debt counts towards that credit score that we were previously talking about. Having large amounts of student debt can reduce the amount of money that you’ll be able to borrow.

And finally, while the indexation rate on these types of loans is very low, it is possible that the government will increase it to a more appropriate market rate. The government’s attitude has certainly changed over the last couple of years, to the point where they’re now even chasing people who have moved overseas to make repayments on their HECS-HELP debt. This indicates things could get stricter some time in the not-so-distant future.

If you have this type of debt, do the work to find out exactly how much you have and put the right actions in place so that you can use your parcels of $1000 to pay it off for good. And when it’s gone, enjoy the fact that you have proudly returned the money to the government so that other students can take their turn building their education and career opportunities.

PRIORITY 4: HOME LOANS

Okay, I’ll go a bit easier on home loans. But not too much! Your home – as in the place that you live in, not somewhere you rent out for passive income purposes – carries a lesser form of toxic debt. The reason why I’m a little kinder towards this type of debt is that when these loans require principal and interest repayments, you’re forced (ever so slowly) to pay the loan down over time.

Plus, if you’re fortunate enough to buy in the right area at the right time, the property may go up in value. However, I say this with caution, as any growth of the property is in relation to other properties in your area. The growth can be beneficial for you, but if you’re selling and buying back in the same market, you may end up simply shifting from one expensive asset to another. And in the meantime, the interest adds up to a disturbing amount of money over the long term, which often exceeds the perceived capital growth on your property. And you’re holding a large asset that provides no passive income.

So, if you have a home loan, and want to come out as far ahead as possible, one of the smartest things you can do is pay it off as quickly as possible. Having a thirty-year loan and only ever paying the minimum is wasting valuable time and money on interest.

Say you have a home loan of $400 000 with an average interest rate of 6% p.a., and that you pay the minimum monthly repayment that most banks automatically put you on. You’ve only just purchased this house, so the loan has only just begun. You have thirty years until you own the property outright.

In this scenario, you will pay to the bank over $510 000 in interest over the life of the loan. And that’s assuming that you never extend your loan to do renovations, or refinance or redraw any money off the loan.

Also, that $510 000 is money paid with after-tax earnings. So you’ll have to earn at least $750 000 or more (depending on your marginal tax rate) to cover that expense.

However, if you were to pay an extra $1000 every two months (roughly $125 per week), adding an extra $6000 p.a. to reducing the loan, starting today and continuing on for the life of the loan, you’d save over $205 000 in interest and pay off the home loan in full 10.5 years sooner.

That $205 000 you’ve saved can go towards far more exciting things in your life: holidays, helping family members, reducing your working hours, or even an earlier retirement. The choice and freedom is yours. And your monthly cash flow is freed up, as you no longer have to pay $2500 per month in mortgage repayments plus the $500 per month in interest. So you’ll have a spare $3000 per month to use to your heart’s content – whether it be to spend, to save, to invest or even to give away.

There is also a huge emotional and mental benefit to paying off your mortgage sooner. You’ll feel the sense of security that comes from knowing that the bank can’t take away your home (assuming no other loans are secured against it). You’ll also feel a sense of confidence even if the property market dips, as the reduced value of your home doesn’t jeopardise your finances. You’ll have comfort in knowing that you have the choice to use the equity in the property, should you wish, as well as general peace of mind. All of which will contribute to a good night’s sleep and possibly slow the ageing process!

So, if you like the sound of paying your home off sooner, and not wasting such a huge amount of your hard-earned money over the years, this is definitely something that you could include as one of your goals for the $1000 Project.

PRIORITY 5: SAVINGS

Having a certain amount of money in savings can give you a valuable sense of security. It can also stop you from reaching for a credit card or a loan in the event of an emergency, big or small: parking fines, unexpected dental work, car repairs, medical emergencies, redundancies, illnesses, and so on. If you’ve just finished all the hard work of paying off previous debt, you don’t want to open the door for bad habits to creep back in.

Unfortunate and costly things can happen suddenly to all of us – they’re just a part of life that we have to accept. But we can choose to be well prepared for these obstacles, emergencies and challenges, and I want to help you achieve that. Having a nice amount of money in savings to help defuse stress in your life is a sensible goal to have.

Your first question is likely, ‘How much I should have in emergency savings?’ If you google this, you’ll find all sorts of answers, ranging from several months’ worth of salary, to a certain multiple of weekly expenses, to flat dollar amounts.

In my opinion, the only right answer is what will work for you. Young people with a secure job, no debt, family and friends nearby and minimal financial responsibilities may only need a small amount of money for comfort and security. Additional savings beyond this may be a waste of resources for such a person, as that money could be put to better use.

By comparison, a young family relying on one income, with large financial responsibilities and growing family expenses, might prefer a larger amount for peace of mind. They may, for example, want six months’ worth of expenses in cash that can be accessed at all times, or $5000 for last-minute flights to see elderly family in an emergency, or simply the security of a specific dollar amount.

Only you can work this out, as the answer revolves around your life and your needs.

Take the time to work out what possible challenges exist in your world and how much money you would need to rectify these problems to the best of your ability. Then make it your goal to use the $1000 Project to build up these necessary savings.

PRIORITY 6: WEALTH CREATION

If you’re toxic-debt free and have built a comfortable nest egg that will cover you for a rainy day, and now you want to think about being completely financially free to choose how to spend your time and where – well then, this is your stop!

The best place to start is to figure out how much money you need to live the life that you desire. Which means knowing how much you spend today, and then adjusting that according to what you really want and need.

Start by writing down all of your living expenses and adding them up to see what the total is. Every single detail has to be considered – from morning coffees and chewing gum to annual holidays and gifts. Leave nothing out, and keep in mind that the more honest you are, the more awareness and understanding of yourself you’ll gain.

To help you with this process and to make sure you don’t miss any expenses, you could either keep a spending diary for a month, or check your bank and credit card statements carefully – or even better, do both! I actually designed a budgeting app called SugarBudget to help make this as easy as possible for you, and to make it easy to review and update your budget at all times. You can find this in the Apple app store. It even gives you banking instructions to help you achieve your financial goals and reminds you when large quarterly or biannual bills are due, so there are no nasty surprises and you have the cash properly set aside, ready to pay these bills (snagging your money stress-free).

This process of checking your true cost of living is enlightening, but it can also be painfully grounding.

It’s human nature in a consumer-driven world to downplay the true extent of our living expenses. When I’m working with financial planning clients, it’s so common for me to hear, ‘Well, I don’t actually spend that much . . .’ But then, when we sit down together and go through this process, the colour quickly drains from their faces as the ‘calculate total’ button is pressed!

I’m guilty of this kind of thinking myself sometimes. But I know that, at the end of the day, living with my head buried in the sand is only doing a massive disservice to myself and to the potential changes and outcomes I can create. So when I check my budget, my savings accounts, my investments, my home loans, my superannuation accounts, they tell the truth. The truth that I need to hear. And from this knowledge comes the motivation for action.

After you’ve worked out your current living expenses, you then need to add or remove the expenses that you want to include in your goal of being financially free. For example, if you want more holidays, add in enough money to your annual budget to cover that cost. If you want to pay school fees for your children or grandchildren, add them in. If you want to be able to give more to charity, add that in. This is a creative process and you are planting valuable seeds into some seriously fertile soil, so give yourself the freedom to imagine your ideal future.

And remember that your idea of being financially free may not require any more money than what you’re currently spending. You might already be happy with your lifestyle – or your goal could actually require less money. For example, you could have a dream of relocating to a small town where the cost of living is much lower, or even to another country where the taxes are less.

When you’ve established the magic number – your projected annual cost of living – you need to get started buying and building passive income streams so that eventually your passive income can pay for the dream to become your reality.

If you think, for example, your cost of living will be $50 000 p.a. (just under $1000 per week), remember to round this up for tax and add a buffer for emergencies. This means you need to acquire and invest in passive income streams over time that will generate a gross income of $70 000 p.a. for you.

As soon as you know your total magic number, make it one of your key financial goals to start building it as soon as possible. Watch it grow, add to it, reinvest in it and review it regularly so that every step gets you closer and closer, and you can enjoy the pride of knowing that you’re really doing this!