Get Out Of Debt

What follows is a simple technique to tackle a personal debt situation with is getting out of control.  Do you have a mortgage, personal loan, credit card debt and other forms of debt as well?  I’ve been there before and I used this method to pay down my borrowings and save heaps on money in interest payments.

I don’t recall where I first heard about this system, but I found it so efective I thought I’d share it here.  You need to start by making a list of all of your debt along with the interest rate and the monthly repayments.  Now order the list with the highest interest rate at the top and the lowest at the bottom.
At this point you’ll need to take stock of your finances and make sure you are at least making the minimum repayment on each of your loans.  If not, you’ll need to balance you budget - cut your spending to less than what you’re earning.  Ideally you will be in a position where you are making the minimum repayments and have a little cash left over at the end.

To implement this strategy, you will need to do the following.  Continue to make the minimum repayments on each of the debts.  Then put any extra cash against the one at the top of your list from above - that is the one with the highest interest rate.  Each month continue this pattern until the most expensive debt of paid off.

The next step is to take the amount of the repayment you were making on the top item on your list and apply it to the second one on the list - in addition to the minimum repayment.  This is the key to the whole strategy and it can’t be over-emphasized.  Make sure you take the extra cash and pay it off the next most expensive debt.

In this way, you’ll work down the list from most expensive to leasst expensive untill all of your cash flow is going to your one remaining loan - which in most cases will be your mortgage.  You should start to make real progress now and this should keep you motivated.

For most of us the mortgage we take out when we purchase a home will be the biggest single debt we’ll ever have. It’s a huge financial commitment. The monthly repayments can feel like a dead weight around our necks. And the term of the loan seems to stretch out before us forever - 25 years is the typical term for a housing loan in Australia and that seems like (and is) a long time. So what’s the best way to deal with this situation? Pay off your mortgage - fast!

What do I mean by that? Tackle the problem head on and repay that mortgage more quickly. Instead of taking the full 25 years, aim for 15 or even 10 years. It’s not easy for most of us but you’d be surprised what you can do with a little planning and discipline. And the benefits of eliminating that mortgage are many. First up, you’ll save money. Have you ever worked out how much interest you would pay over the life of a 25 year loan? It’s staggering when you see it written down in front of you. I nearly fell out of my chair when the bank manager presented the figures at the time we applied for our first mortgage. For example, on a $100,000 loan over 25 years at an interest rate of 7.5% you would be paying over $120,000 in interest alone (that doesn’t include the principal) over the period of the loan. If you were able to pay off the debt just 7 years early, you would save nearly $40,000.

And you’ll get a better return on your investment. You would have to invest your money and earn a higher rate of return than 7.5% after tax (in the example above). If you put your excess funds towards paying off your mortgage you’ll earn the equivalent of a 7.5% return - risk free. How many other investments offer an after tax return of at least 7.5% with no risk? You’d be hard pressed to find any.

And as I alluded to above, interest payments on a loan used to buy an owner occupied property is not tax deductible. You should bear this in mind if you have other tax deductible debt you’re paying off. For example, if you’ve borrowed money to buy an investment property or maybe a share portfolio, the interest you’re paying on that loan is most likely tax deductible. You may be better off paying down your own mortgage first.

Now as I said at the outset, paying off your mortgage early is not an easy task for most people. However the financial gains you could receive make it well worthwhile.

It’s what we all want isn’t it?  We all want to live debt free - to remove the burdon of the debt repayment each month.  But how can we achive it?  Let’s be realistic - it’s difficult for the average person to go through life without accumulating some debt.  The key is not to let it get out of control.

Like most people, I owe money.  I strive to minimize the amount owed and I try to borrow in the most efficient way possible, but I still need that extra finance from time to time to provide for my family.

That’s what Get Out Of Debt (is it a coincidence that the initials spell GOOD?) is all about.  As I struggle to keep my borrowings under control, I will post what I hope are useful articles to help other people deal with debt.  Hopefully together we can all reach our goal to be debt free before we’re to old to enjoy it.

Be warned though.  As this is a personal blog, I am likely to wander a little (okay - maybe a lot).  In fact who knows what sorts of strange ideas may enter my head in the coming weeks and months?  Certainly not me.  But that wont stop me from from bashing away at the keyboard in an effort to free my thoughts and let them roam cybespace untethered.

One of the reasons I chose a blog format to do this is that it makes it easier for others to contribute and share their own ideas.  So don’t be shy - let me know what you think.  I welcome any new ideas and criticism (hopefully constructive).  I don’t mind if you just leave a comment and tell me to pull my head in.

With all of that now said and this intro post out of the way, I’ll now need to think of some real stuff to write about.  Let’s get started on our "journey" (don’t you hate management speak?) - let’s get out of debt!