Just like football, meat pies, kangaroos and Holden cars, debt seems to be a national past time in Australia. According to the Australian Bureau of Statistics 74% of Australians held debt in 2016, with the most common type being credit card debt. Whilst the trend shows the percentage of households in debt has not changed a great deal in the last ten years the average amount has almost DOUBLED.
However all is not lost, we as a collective have the ability to buck that trend and smash your debt starting with a few simple tricks.
1. Weekly or Fortnightly repayments
Generally when you sign up to a loan with a bank or any other financial institution they will automatically put you in monthly repayments. Whilst this may seem logical at first (a lot of people get paid monthly in Australia) it is actually more beneficial to pay back your loan weekly or fortnightly. The reason is simple, there are 12 months in a year which means if you are set up in monthly repayments you will be making 12 repayments each year, however if you choose to pay fortnightly you will be making 26 repayments (52 weeks in a year / 2 (two weeks in a fortnight) = 26 fortnight’s) a year, where the equivalent monthly repayments would be just 24 (12 months x 2 (two fortnight per month) = 24.). So by electing to pay fortnightly you will actually be making an additional half monthly payment per year!
You do need to ensure that your fortnightly repayments are the equivalent of a “half-monthly” payment as opposed to your total annual repayments divided by 26. You would still save time and money this way, but not as much.
While this might not sound like a lot at first on a multi year loan it really compounds and gives you a significant saving, see the example below.
Over the life of a $50,000, 10 year car loan @ 10% interest you could shave a whole YEAR off the term and over $4,000 in interest payments just by using this method.
It works out the same if you choose to to pay weekly, i.e 26 fortnightly payments is the equivalent of 52 weekly payments.
2. Extra Repayments
Similarly with the above example you can easily knock months off the duration of your loan by putting down some extra repayments. No matter how small it really can make a big difference.
Whatever you choose to do, adding that bit of extra cash really adds up and reduces the amount of time you are in debt.
In fact if you add just an additional $25 a fortnight to the payments in the example above you boost your interest savings to over $7,000 and cut the term by a further 9 months!
You do need to be careful however as some institutions will try and restrict you or charge you fees for extra repayments so be sure to check with your lender.
3. Snowball your debt
Debt snowballing is exactly what it sounds like, start with your smallest debt and work your way up to the biggest until all your debt has been smashed to smithereens by a giant snowball (of cash).
It’s not a new concept and may not actually be the most effective way of paying off debt (depending on your particular situation), however it has a great psychological effect when you see your debts disappearing one by one, and that will make you stick to the plan!
Here’s how it works:
- Make a list of all your debts, starting with the smallest value and going up to the largest value, ignoring the interest rate.
- Determine the minimum payments for all but the smallest debt. If you have direct debits for any of them ensure it is set to the minimum payment.
- Next, work out what the maximum you can pay each week/fortnight/month. You may want to do some budgeting here or even redirect some other funds (savings/investments).
- Over the coming weeks hit that smallest debt as hard as you can until eventually you have paid it all back.
- Now take the amount you were paying against the smallest debt and add it to the minimum payment for the next smallest debt. Again smash this debt as much as you can, then when that one is gone repeat this step until you have smashed all of your debt!
You have now created your very own debt snowball!
One of most important tips is to not cheat, make sure you take that full amount you were paying each week onto the next debt otherwise you are disrupting your snowball and slowing your progress.
So that is it, 3 easy tips that you can implement right now to start smashing your debt! To really wipe out your debts as quick as you can use all these steps in conjunction.
Acorns is a great introduction to investing and a great and tool to help kickstart your investing journey!
Got a great debt smashing story? I would love to hear it in the comments below or via my contacts page.
Thanks for reading