Getting into debt can be dangerously easy. There are numerous lenders and retailers offering deals and finance that can seem too good to be true.
As you move through life there are often times you need to borrow money to help get you where you want to go – you may want to complete your education, purchase a property, or launch a new business venture.
While the short-term results of taking on debt are generally positive, you can be left feeling that your finances are spiralling out of control. Although debt levels can seem surmountable, there are choices you can make to improve your situation.
Speed up your mortgage payments
Most of us will have a mortgage in our lifetime, which we accept is a huge commitment that may take decades to pay off.
Buying a house is the biggest purchase most people will make in their lifetime. It’s a decision that can cause even the strongest amongst us to lie awake nights wondering how the mortgage payments are going to be met. Up until 1990 paying your mortgage monthly was the only option. Now you can now pay fortnightly, weekly and almost daily by using revolving credit facilities, so by managing that debt more effectively can pay huge dividends.
However, if you can find just a few extra dollars in your budget each week, you could take years off the time it takes to repay your mortgage.
Let’s take $50 as an example. It doesn’t matter if it’s student debt, credit card debt, or re-paying a mortgage, an extra $50 a week can make an enormous difference.
Let’s imagine that our client John has a $250,000 mortgage, with an interest rate of 8.7%, and he wants to make fortnightly repayments over 30 years. This table shows his regular repayments and the impact of putting another $50 a week into his repayments.
|F/n payments||Time to repay||Total paid||Interest paid|
|$900||30 years 6 months||$535,949||$370,258|
|$1,000||20 years 11 months||$444,004||$251,204|
|Savings||9 years 7 months||$119,054|
The extra $50 a week ($100 a fortnight) means that John’s mortgage is repaid almost ten years earlier, and he saves himself a whopping $119,054 in interest. It also means he can start looking at other investment options a lot earlier.
Most financial institutions give you a choice of fixed or floating rate mortgages, so take advantage when interest rates are low to “lock” in a portion of your mortgage, and give yourself more financial security. Consider making weekly mortgage payments, as this will reduce the principal more quickly.
While inflation has been modest for most of the last decade at around 2%, you should be increasing your regular re-payments to keep up with inflation, otherwise, you are saving less each year in “real” terms (after inflation). If you get a salary increase, then use part of that to increase your regular mortgage payments.
While the savings he makes on his interest payments is certainly significant, John benefits even further in that he now has the opportunity to start saving during the years he would have been repaying debt. This will obviously give him more capital and flexibility when it comes to deciding his future plans.
Clearly, the sooner you repay your debt the more choices you will create. Getting into debt is extremely easy, but getting out of debt can take years of hard work and can limit your lifestyle choices, so yes $50 a week is worth saving.
When it comes to retail debt, there are many great offers. Check them out carefully, but interest-free deals are up for grabs sometimes, even including deferred payments, so consider using these offers rather than parting with a lump sum.
It always pays to read the fine print, because penalty interest at the end of the finance term can be crippling, so plan carefully and use automatic payments so that you don’t forget.
Plan well and make your money work harder than you do, and maximise your prosperity.