TARGETING non-deductible debt is a sound and effective technique in the fight against financial stress.

Yet more signs emerged this week to indicate Australia's economy is slowing. On Monday, The Age reported Melbourne's auction clearance rates had fallen to 63%, down from 80- 90% last year. It looks like Australians are tightening their belts.

In a relatively short period, people have started switching from a "borrow and spend" mode to a "budget and save" mode.

One component of an effective budget is managing debt. There are key techniques to debt management and how to bring debt under control.

Identify debt Before tackling any problem, you first need to define it. Generally, debt can be divided into two types: current debt and future debt. Current debt includes outstanding monies on a principal residence, investment loans, credit cards and personal loans. Future debt includes a holiday, investments, education expenses, car expenses or the purchase of property. You can break debt into additional subgroups. For example, jot down your debts according to their rate of interest. This lets you see the extent of your liabilities side by side.Ascertain deductibilityInterest and expenses on debt will be either deductible or non-deductible for taxation purposes.

You can claim a tax deduction for the interest and expenses on some forms of debt that add to your assessable income each financial year. Deductible debts can include investment loans for property, shares and managed funds. Also, the cost of borrowing needs to exceed the income for the asset to provide a tax advantage.

Common non-deductible debts include credit cards, home loans and some personal debts.

Prioritise and manage repayments A recurring question we are asked is, "what should be paid off first and why?" If you are battling with credit cards, personal loans, investment loans and store cards, it's difficult to know where to start.

Credit cards are often an issue because of the high interest rates charged by lenders. If you have more than one card, you should consider paying off the one with the highest interest rate first and look at paying above the minimum required amount. This can slash the interest you pay and the time it takes to repay the debt. You could also consider consolidating your credit card debts using a personal loan.

What about your mortgage? Is refinancing an option?

Banks that are experiencing large increases in their cost of funds may be passing on these costs to borrowers. In other words, refinancing may save you interest. If you have a loan more than three or four years old, it's worth re-evaluating your situation as a newer product may better suit your situation. Also, don't expect the bank to come knocking with a new deal — you will generally need to initiate the inquiry.

If you are worried about the risk of your variable rate loan increasing, consider a fixed-rate loan for comfort of certainty. If meeting principal and interest payments is too heavy a burden, think about converting your loan to interest-only payments to ease the load for a short period.

Another option if you're really stretched is to refinance a 25-year loan to over 30 years.

Stay committed At the heart of successful debt management is a solid budget. Putting a budget in place can give you an enormous sense of satisfaction and peace of mind that you're bringing your finances under control. Budgets, however, take commitment and discipline. Be sure to set realistic goals for your budget, don't stray from your goals and don't give up if you overspend. It's OK to fine-tune. A licensed or appropriately qualified financial adviser can help you put in place an action plan for tackling debt through a budget. They will also provide advice on wealth protection, which is often overlooked by individuals who are trying to manage debt repayments but who struggle if they become unable to earn an income.

The Age April 5th 2008