Get Out of Debt Fast

Extravagance over the holidays often leads to promises of spending less, saving more and getting out of debt or at least debt consolidation. Nila Sweeney, editor of Your Mortgage reveals a handful of tried and tested strategies to help you whip your finances back in shape.

The onset of a new year is always a good time to re-examine your income and spending habits over the past year. With mortgage interest rates likely to increase over the next 12 months, there has never been a more important time than now to start looking at what you can save, how soon you can save it and what to do with the savings.

But how can you save if you’re barely making ends meet with your current income?

Here’s an action plan to help you trim down your mortgage while beefing up your bank account.

1. Create a realistic budget and stick to it. The key word is ‘realistic’. There is no point placing a strict budget on yourself that you know you won’t stick to. Get yourself a spreadsheet and list absolutely everything down to the last latte. Make sure you include everything you spend on a weekly/fortnightly/monthly or yearly basis. This can be time-consuming but having this information enables you to make sound financial decisions about the future.

2. Budget for larger items like car insurance and registration. If you put a little aside each month, your credit card won’t take the hit come premium time.

3. Get educated. Keep up-to-date with the latest home loan products available and pay attention to the mortgage interest rates in the marketplace. Newspapers, magazines such as Your Mortgage magazine and financial websites are all great ways to keep yourself abreast with the market.

4. Squirrel away a small amount each week for the upcoming Christmas/holiday period and save yourself the ‘January Blues’. Start saving now no matter how small. Set up a direct debit from your transactional account to a savings account – you can’t spend it if it’s not there.

5. Separate funds that are being held for future expenses into a separate interest bearing, no fee account. This stops you from ‘accidentally’ spending those funds and has the added bonus of earning interest. Better yet, put the money where you don’t have easy access to it. That means making sure it’s not in an account where you have access with your ATM/ETFOS or credit card.

6. Shop around for the highest interest rate in savings. There are plenty of products in the market offering high interest rates with no fees. It pays to search around for the best deal. You can also enlist a mortgage broker to help you hunt down the best deal.

7. Channel any surplus funds into the debt account that charges the most interest while maintaining minimum repayments on other accounts. For example if your credit card interest rate is 17% and your store card has a rate of 13%, direct minimum payment to the store card and surplus funds to the credit card – this will save the interest paid at a higher rate.

8. Continue to live on your previous salary even if you are lucky enough to receive a pay rise – that way you can use the extra funds towards savings or your mortgage.

9. Fix your mortgage repayments on a make-believe rate rise. Get ahead of any future rate rises and fix your home loan repayments on a higher rate now as if the rate were 1-1.5% higher. This enables you to pay your home loan off quicker and save a lot of money in interest before any rate rises and thus get ahead while rates are unchanged.

10. Make fortnightly repayments. Set your loan repayments fortnightly instead of monthly, as you will then be making 26 payments in a year rather than 24. This in turn will save you interest costs and reduce the term of your loan. For example, if you have $250,000 loan for 30 years at 7.82%, a fortnightly mortgage repayment will save you $114,926.11 and reduces the loan term by seven years and three years over the life of the loan.

11. Get a cheaper credit card. Switch to a low interest card and choose one without annual fees or transfer fees. If you have $1,000 on your credit card at 15% interest, switching to a lower interest card at say 8.9% with no annual fee will save you more than $800 on interest and fees each year. If you put that saving in your mortgage you will cut your 30-year $250,000 loan by three years and eight months and save more than $58,000 on interest.

12. Avoid fee-charging ATMs. You’re throwing away between $2 – $5 every time you use these cash machines. If you use them three times a week, you will be wasting up to $60 per month. Avoiding them and using the savings on fees towards your mortgage, you would save you more than $54,000 on interest and reduce your mortgage by three years and four months.

13. Check your insurance rate and coverage. Make sure you’ve taken adequate insurance to cover your expenses and mortgage repayments in case something happens and you can’t work. Mortgage protection and income protection insurance can be expensive so make sure you shop around for products that offer enough coverage at a lower premium.

14. Brown bag it. Bringing your lunch from home more often in the working week and putting the savings made into your mortgage can significantly reduce your interest payment and the term of your loan. A sandwich can cost you $7 to buy. If you made your own lunch for just three days a week, you could save $21 a week or $84 a month. If you put that extra monthly payment into a 30-year $250,000 mortgage at a rate of 7.82% p.a., you would save yourself about $71,519 in interest over the life of the loan and reduce its term by four years and five months.

15. Give up smoking. If you smoke a packet of cigarettes a day at $10 a packet, by giving up and putting that money into your mortgage weekly, you save 10 years seven months off your $250,000 loan over 30 years. If you give up now you might be here long enough to see the savings as well!

16. Walk more often. If you walk a little more, say to the shops or work or picking up the kids you could save a considerable amount on fuel. A full tank of fuel on the family car costs probably $60 or $70, so any savings can be channelled into your home loan.

17. Spend more time with your family. Aside from getting to enjoy the house you pay so much for, you can also save money. If you can save $20 per week and pay it off your loan rather than an afternoon at the pub with your mates, then you will save four years and three months off your mortgage not to mention $68,811 in interest.

18. Ditch the take-away. We all love the take-away meal and seem to eat them on a regular basis. If you were to give up one super-sized take away meal a week, say $7, and pay it off your home loan you would save nearly $25,000 and also about two years off your loan, plus imagine how good you will look.

19. Get a pay increase. Tell the boss you have done a great job and you want a pay increase. An extra $100 a week saves just under 13 years off a $250,000.00 loan and a whopping $174,000 in interest. If he says no, get a new job, but make sure you do not leave your current job until you found a new one.

20. Allow yourself occasional treats, but don’t lose sight of your end goal. Be realistic about your goals and try not to sacrifice your lifestyle too much because this is a budget that you wanted to keep in the next 20 years or 10 years at least.

Like all New Year Resolutions most don’t get fulfilled, but if you can just do one you will be personally better off as well as financially.