Let’s clear one thing up before we go on. I am not a financial adviser, so what I share with you below are not based on an official financial advice, in fact none of the advisers have ever told me these simple steps! Below I will share with you things that I learnt as a (at one stage struggling) single mum and now investor.
As an investor, I am a great fan of leveraging other people’s money, and I use leveraging regularly to grow my income producing asset base. After all, the aim is to have my lifestyle funded by the passive income derived from my asset base. So my only criteria on investment debt is to ensure that overall my portfolio is in the positive.
The debt I urge people to eliminate, and where possible never get into, is credit card debt, store card debt, debt for the toys – like cars, boats, motor bikes or the latest fashion items. Any debt that relates to stuff that doesn’t grow in value. And even though the family home goes up in value over time, whilst you are paying a mortgage on it, that’s also a liability in my eyes as you cannot claim any of your running costs, like you do with an investment property.
These debts can stump your financial growth by their high interest rates, and seemingly low repayment costs. Why? Because they are designed so that you never pay them off if you follow the minimum repayment plan. Not only that but a $1,000 on a high interest rate credit card equals to $10,000 less if you want to borrow to invest!
So what can you do to eliminate these debts as quick as possible?
Take stock on where are you at
Unfortunately, most credit card and store card debt increases because of impulse purchases, that are followed by guilt, as such not many people like to revisit that feeling by actually taking account of where they are at. However, it is a very important step in the elimination process.
So pull out every single current account statement that relates to credit cards, store cards, car loans and the like. Note down their current balance, repayment terms, i.e. 5 years or endless, minimum monthly repayment amount, interest rates, running costs and penalties for early discharge.
Then take note of how you are actually repaying them at the moment. Are you paying the bare minimum a month or are you putting in extra cash? Are you paying them once a month?
Once you have this picture, we can start juggling things around.
We want to eliminate debt fast and feeling good about it. So what I recommend to my clients is to pick the lowest balance debt to pay off first, even if it is not the one with the highest interest rates. It may seem insignificant, however it gives us a great psychological boost to knock the debt off one at a time!
Juggle the repayments for maximum effect
Now let’s get to work! I find that on many occasions people try to boost their repayments a little. But the efforts end up being fragmented. So what we want to do is create a concentrated effort.
Identify all the accounts where you are paying extra into. We need to take those extras off, and redirect to the first debt you chose to eliminate on top of the minimum repayment for that account.
Then let’s look at the payment terms, we don’t want to pay any of your debts monthly! The reason for this is that interest is calculated daily and added to your bottom line, hence you are not getting ahead anywhere fast.
To get the fortnightly repayment amount you can’t just half your monthly repayments, as there is an extra fortnight in each year. You need to calculate it as follows: (Monthly repayments X 12)/26.
Once the first debt is paid off, you need to take all the money you were paying into that debt and add it as extra repayments into the next item you want to eliminate on your list. And so on. See how we are creating an avalanche?
You don’t need to manage these manually. In fact you shouldn’t. Instead make sure you automate them. Depends on what it is you can manage it through your payroll, financial institution or online banking.
Eliminate the possibilities for relapse
I recommend to reduce balances as you reduce debt or even chop up cards and discharge loans. There is no point on trying to eliminate debt if you end up creating new ones along the way.
Once you got rid of all bad debt you can look at growing your savings and investment accounts!
About Your Guest Blogger: I’m Orsolya Bartalis, co-author of Reboot Your Life, Every Entrepreneurs Guide, the Australian Property Book and founder of Unlimited Results. She studied business and personal finance before co-authoring the books and creating Unlimited Results to help others achieve their dreams. She can help you find your passion, win back your time, and master your finances. Will you join her? www.unlimited-results.com
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