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Debt Free

Budgeting

How the Debt Snowball Can Get You Debt Free Faster

Posted on September 7, 2021

There is no faster ticket to financial freedom than being debt-free. Having debt can weigh us down and keeps us stuck, making it difficult to make the changes we want to in life for the better.

When we are in debt, more of our money goes to covering past decisions rather than funding future opportunities.

When you don’t carry debt, you free up your hard-earned money to put towards the things that truly add value to you such as, adding to your retirement savings, saving for a goal that is important to you or changing to a new career that you are passionate about but that involves taking a pay cut.

Several years ago, I came across the Debt Snowball Method for reducing your debts, being just one of numerous debt repayment methods.

I’d always considered focusing on the interest rate the smart way to go about debt repayment. It seemed more financially savvy to me to focus on the dollars involved and the interest saved.

But since discovering this method of debt repayment, I could also see the benefit in paying off debts from the lowest to highest balance over-focusing on the interest rate or dollars saved.

It is really a personal preference, personal finance is just that, personal!

Benefit of the Debt Snowball Method

The main benefit of the Debt Snowball, is that this debt repayment method is designed to give you ‘quick wins’ when it comes to your debt as you focus on paying as much as possible onto the lowest debt until it is paid off. This is a great debt repayment method for people who have a number of debts with different balances and who need that little extra reward when it comes to sticking out their financial goals.

Paying off debts is a hard slog. When you see how many years and repayment periods are left on your debt, it may seem like there is no light at the end of the tunnel and you may feel like you will be stuck paying those debts off indefinitely.

The key to the Debt Snowball is building momentum. Building new habits is tough and we often need instant rewards in order to keep us working towards our goals and that is why this debt repayment method can give us the small financial wins that we need to stay motivated when paying off debt!

When we want to lost weight we join a gym and closely watch the scales. It can be hard to stay motivated when those scales don’t budge in the beginning. When you finally lose that first kilo, it feels amazing! And all your effort starts to feel worth it. The small win, helps you stay focused and feel more determined on your weight loss journey.

Can you imagine trying to lose weight if you didn’t notice any benefits for 6 or 12 months? This is why the Debt Snowball can be so effective at helping you get on top of your debt. It focuses on knocking down the smallest and easiest debts to tackle first. With each debt repaid, you can see your progress a lot sooner than if you attempted to pay out a much larger debt.

There are no short-term solutions to paying off debt. It is likely going to be a slow and difficult journey but one that will be well worth it!

Imagine all the things you could be doing with your cash if you were debt-free:

Buying your first home, being able to finally take that dream holiday, starting your own business or investing for your retirement. These goals will be easier to fund once you get your lingering debt out of your life!

Keep these dreams at the forefront of your mind! If you have a partner, discuss what your dreams are together. Maybe you have the same dream, maybe they are different. But these dreams are going to be the motivation you need to keep going when things get hard.

>> If you like this post, you’ll love: “10 Easy Tips Save Money Groceries Budget“<<

But just before you dive into how to start your Debt Snowball I want to talk about something that is extremely important for your financial journal and a must before starting your Debt Snowball – the importance of building an Emergency Fund!

BUILDING AN EMERGENCY FUND

Before attempting to Snowball your debts you need to save an Emergency Fund. This will be a financial buffer for any financial emergencies that pop up whilst you are paying off your debt. It’s critical to have an Emergency Fund as you can’t pay off your debt whilst you are still living off your credit cards and adding to your debt. We don’t want to keep digging a hole for ourselves while we are trying to pay it off. You’re just going to end up back where you started and finding the whole process slowly destroying your original motivation to get on top of your debt.

Many finance experts recommend having an Emergency Fund between $2,000 and 3-6 months of expenses. I recommend having a starter Emergency Fund of at least $2,000 or ideally one month’s expenses set aside for financial emergencies at a minimum. This is a reasonable savings buffer to help you in times of emergency to put out any financial fires that come up whilst you are paying off your debt.

Of course, some of you may not feel comfortable with such a small Emergency Fund, so if that is you, you can certainly bump that up to 3-6 months’ expenses. But you do need to weigh up how much you want to set aside. It doesn’t make much financial sense to save a huge amount earning 1% in interest when you are paying 22% interest on your credit cards! That money is going to serve you better by paying down your high-interest debt!

Do what it takes to save up your Emergency Fund quickly so you can start paying down your debt as fast as possible. Ensure that your Emergency Fundis only used for emergencies. If you need to replace a tyre or you have a dental emergency, the money will be there for you. Just be sure to save up and top up your Emergency fund again as soon as possible!

Once you have saved your Emergency Fund you can move onto your Debt Snowball.

Check out these 40 Side Hustles to Help You Pay Off Your Debt Quicker!

THE DEBT SNOWBALL

With a small amount of planning, you can be well on your way to paying down your debt.

Please remember, this is just one of many debt elimination strategies so you don’t have to use this approach to pay off your debt if it doesn’t resonate with you.

Here are the four steps to use the Debt Snowball Method.

Step One:

Write down all your current Consumer Debt (Exclude your mortgage) in an Excel worksheet or on a piece of paper. Go back to your loan paperwork, online banking, or credit card statements and work out what your current debt balances are for all outstanding debts as of today.

Then, take note of what Interest Rate you’re paying and your monthly Minimum Repayment.

For the Australians out there, getting a current HELP loan debt statement is not possible as these are only sent out annually with your tax return. Instead, enter the HELP balance that was on your most recent Tax Assessment paperwork and make a note to update this when you get your next one.

Step Two:

Once you have written all your debts down, number them from 1, 2, 3 and so on from the smallest balance to the largest. Debt Number 1, the smallest debt balance will be the one that you are going to pay off first and attack with your Debt Snowball first. The last debt will be the highest debt balance.

Work out based on your budget, how much extra on top of the minimum repayments you can afford to put on your smallest debt for that month. If your lowest debt has a minimum monthly repayment of $25 and you can spare another $100 a month, start paying the $25 minimum repayment plus the additional $100 repayment, or whatever it is that you can afford.

Continue to pay Debt Number 2, 3 and so on as minimum repayments. Continue to do this until Debt Number 1 is fully paid off. Be sure to utilise any additional income, such as bonuses or tax refunds to go towards your debt. We want to make sure we are throwing every dollar we can at our debt! If you were under budget for the month, you can add that extra money as an additional top-up payment on your Number 1 debt to help you knock it down even faster.

Step Three:

Once your smallest debt is repaid, take the minimum payment for Debt Number 1, in the example above, that would be $25 a month, and add your additional repayments of $100 a month and add this to the minimum repayment for Debt Number 2 – your second lowest debt.

This means you will now be paying a much larger amount on your second debt – saving you significantly in interest and getting you to your debt-free goal much quicker. If your monthly repayments for Debt Number 2 were $40 you will now pay the minimum amount of $40 plus the $25 and $100 you were using to pay off debt number 1. In effect you are building a ‘snowball’ of your repaid debt repayments! Continue to do this until debt number two is paid.

Step Four:

Continue to do this for each of your debts in the snowball until the last one is paid off. For each new debt paid off, you will be taking the past minimum repayments plus your additional repayment and carrying it forward to the next debt in your snowball. Like a snowball, the repayment for each will grow and pay off a bigger chunk of each debt as it grows and moves to your next biggest balance.

Debt Snowball Worksheet

In order to help you keep track of your Debt Balance and Debt Snowball Repayments, I have created a Debt Snowball Worksheet so you can keep all your Snowball info: Current and Closing Balance, Interest Rates, Minimum Repayments and your Snowball Repayment in the one place.

It will help you to create a monthly budget so you can pre-plan how much you have to pay towards your Debt Balances and will calculate your Debt Free Date each month so you know when you will be debt-free!

Check out the Debt Snowball Worksheet to help you to track your Debt Free Journey and motivate you on your Debt Free Journey!

Your Debt Snowball Worksheet Will help you to Track Your Debt Free Journey

STOPPING THE DEBT CYCLE

Here are some tips to help you stay out of debt and to help you get to your debt-free journey sooner:

If you can’t afford it, don’t buy it. This one may seem obvious, but in 2020 the 6 million active Buy Now Pay Later Users (Source: RBA) in Australia haven’t got this memo. If you are using credit cards, whatever you are buying you are likely paying 20% or more in interest each month whilst that amount remains unpaid. Does that sale price look so good now?
Cut up your credit cards. If you are the kind of person that can’t resist a good deal, you can’t pay your credit card off in full each month it might be time to cut those cards up or hide them away until you have got your finances under control, where you can afford to pay them off in full each month.
Start setting goals! It can be easier to part with your hard-earned cash when you have no plan or goals for your money. Having a goal can help you keep that goal top of mind and help you when making purchasing decisions. You can ask yourself, do I really want this extra pair of shoes I don’t need or do I want to keep that money for my holiday?
Learn to be content with what you have. Do you really need a brand new $35k car on finance when your current car works perfectly fine? Are you willing to pay x dollars every month for the next 60-plus months? In good times and bad – when you are unemployed, when you are trying to live on one income when you decide to cut back hours at work to study for a new career – that debt is going to still be there!
Avoid shopping! It’s surprising how little you spend when you avoid going to the shops unnecessarily. If you have endless emails from clothing shops or stores that tempt you unsubscribe from them as well. Instead of going shopping, meet a friend for coffee, read a book, watch a movie. There are plenty of hobbies that are much cheaper and more valuable uses of your time.

Minimise With Me Financial Coaching

If you are still struggling with paying off your debt and staying motivated on your debt-free journey, consider hiring a Financial Coach to help you achieve your financial goals. You can check out Minimise With Me Financial Coaching Services here for more information on how you can start spending your money with intention so you can spend your money with intention.

For tips on how you can save more money to help free up cash for your Debt Snowball check out 11 Everyday Tips to Save Money.

How would you feel if you were debt-free? How would it change your life? Let me know in the comments below 🙂

Budgeting

18 Tips to Help You Break the Debt Cycle

Posted on June 23, 2021

Being stuck in the debt cycle can seem like a treadmill of stress and struggle to try to keep ahead of what may seem like never-ending repayments. Once you add a mortgage, car loan, a few credit card repayments, and some BNPLs to your budget finding any spare cash can become increasingly difficult and make it harder to break away from debt and get back on your financial feet.

If you are constantly making purchases with your credit card and not paying them off in full the following month you are going to eat up a lot of your hard-earned income in interest payments. Money which could be better utilised whether that be; saving for a new home, saving up for your child’s education, putting away for your retirement or having some spare cash for enjoyment such as holidays or seeing your favourite band in concert.

No matter where you are on your journey to financial freedom, there are methods to help you get on top of your debt. Even for anyone with significant amounts of debt, their financial story isn’t over and they can potentially have the most options for action in terms of retraining their habits and living within their means. No one needs to live under a cloud of debt indefinitely. There is a way out!

18 Tips to Help you Break the Debt Cycle

1. Think about the Interest Rate

It can be so easy to forget that the price tag of the item you are about to swipe on your credit card is not the final price you will pay if you don’t pay your credit card off in full when the bill comes.

If your credit card’s interest rate is a whopping 20% or more, every purchase you make on that card that is not paid in full will attract hefty interest charges.

That $99 dress that was 50% off that you just charged will cost you a hell of a lot more over the years if you don’t pay off your credit card balance.

And it doesn’t stop there, that is just one purchase – imagine that interest on every purchase you make! That sale price doesn’t look as good now does it?

2. Cut up your credit cards

If you are the kind of person that can’t resist a good deal and you don’t pay off your credit card in full each month, it is time to cut those cards up! Stop spending money you don’t have. It sounds harsh but really is that simple. If you can’t show restraint, take the easy step of grabbing a pair of scissors and cutting up that card. It will only take you a few seconds and save you a world of stress and hardship in paying off any extra debt. Don’t let your debt keep spiraling out of control. You can get out of this and you can start today by cutting up those credit cards!

If you are buying everyday purchases on the card and are not paying them off in full at the end of the month you need to reconsider your income and expenditure and spend less than you earn. The only reason to use a credit card is to have it as a tool to keep track of your expenses, to earn rewards points on everyday expenses, and only if you are paying it off monthly! If you are disciplined enough to do this you can save yourself some serious money by keeping your day-to-day cash in your mortgage offset account or in a high-interest savings account. Otherwise, get those scissors out!

3. Stop trying to impress others

A lot of people get caught up in looking at other people’s lifestyles and attempt to keep up with them. I guarantee no one ever asks the same people they are trying to compete with – how much debt do you have? Yeah sure, Joe down the road might have your dream car but he probably also has a $200 weekly car repayment to make for the next 7 years which probably isn’t as appealing to your green-eyed monster.

Yet so many people go out and buy new cars, bigger homes, or brand-name designer fashion to fit in with others without a thought for the struggle that is going to put on their finances, such as affording the basic needs of food, shelter, medicine, or their education. Break the debt cycle!

Do you feel the need to buy the latest fashion and accessories? You might be surprised to find that other people are probably not that interested in what you are or aren’t wearing. People are too worried about their own lives to focus on your daily outfit choices or the fact that you only spent $50 on your handbag rather than $300.

I have often had handbags under $50 and constantly got compliments – no $300 designer bag necessary! I remember my friend’s 21st, I asked her where she got her amazing dress from and she said a second-hand shop! You don’t have to spend big to have nice things in life!

If you are surrounding yourself with people who expect you to meet some kind of designer brand level of outfit choices, your probably need to reconsider who you hang out with or reassess if those friends even really care. Maybe it is your own standards you are trying to keep up with.

4. Avoid shopping without a list

Stop going shopping unnecessarily! You’d be surprised how little you’d spend if you didn’t step foot in the shops at all or open the latest sales email. If you have endless emails from clothing shops or stores that tempt you constantly, unsubscribing from them can help remove that urge to buy.

Make a goal of only going to the shops when you need to and go with a list of what you need to buy and from where that you have built up over a week or more. Don’t walk down the makeup aisle if makeup is not on your list. This alone can help you resist unnecessary purchases as most spending occurs when you are browsing which can end up with you buying something you don’t need and will later regret.

Shopping with a carefully prepared grocery list can go a long way to saving money on your weekly shop that can be redirected to paying down your debts faster!

5. Take advantage of new credit card balance transfers

If you want a leg up to pay off your credit card balances, you can consider a balance transfer to a new credit card, some offer 0% interest on the balance for a certain period of time, usually between 6 to 24 months. This can potentially reduce the interest rate you are paying on your credit cards to 0% and help you get on top of your debt in a short space of time.

Only do this if you cut up the new card immediately otherwise you will end up back where you started. Also, be sure you will be able to pay the balance transferred onto the new card within the low-interest period. The new interest rates can be significantly higher usually starting at 19.99% post the discounted interest period so you will want to pay it back within this time frame to avoid the increased interest rates.

This can be a great way to smash that debt balance in a defined period of time at a lower interest rate. Do not under any circumstances add to the balance of this new credit card. It is not for you to spend with, but as a tool to help you get ahead and pay down that debt!

6. Ask your credit card provider for a better rate

Alternatively to the balance transfer option, call up your current credit card provider and ask for a better, more competitive interest rate. If they want to keep your debt on their books they will have to meet your request and better your interest rate. This will save you on interest charges without the time limit of the balance transfer option.

7. Always pay more than the minimum on your credit card debt

When paying off your credit cards always pay as much as you can onto them each month – avoid only paying the minimum. If you can only afford the minimum find a way to change that – cut other expenditure, get a higher paying job, or a second job to increase your income if changing jobs is not an option. Temporary pain will be required to achieve financial freedom.

By only paying the minimum repayment you can add decades and thousands in interest to the debt you are going to have to pay off. Using Money Smarts Credit Card Calculator a $2,000 credit card balance paid back at the minimum repayment of $41 a month would take over 21 years to repay and cost over $6,500. That means you will in effect be paying for those $2000 purchases three times over for the next 21 years! And for some people, $2,000 is just one month’s expenses. Imagine if this is being charged, month after month. The horror!

Never settle for only paying the minimum repayment. There should be a disclaimer under the minimum repayment on your credit card statement that reads: “what to pay if you want to be in debt forever and pay 3X the price of everything you’ve ever bought and have no desire for financial freedom”.

The only time you should utilise the minimum payment is if you are using the Snowball Method or other debt repayment options and throwing all your spare cash onto the lowest debt and slowly knocking each one to zero.

8. Ask yourself if this purchase is a Want or Need

It is important to consider what our wants are versus our needs. Every time you pull out the credit card or cash, ask yourself is this a want or a need?

If it is a want, something that you’d like but could live without, ask yourself if this purchase is so important to you that you are willing to be snowed under by debt in order to have it?

Is it worth paying potentially 3X (or more) the purchase price of the handbag or new runners over a period of years? Or would it be better just to hold off a couple of weeks or months and save up the cash?

If it is a need and you have truly considered it, go ahead and buy it, but if it is an essential expense it should be covered by your budget and not paid for with debt.

If it doesn’t seem worth spiraling into more debt, rethink your purchase. Sometimes we can become so desensitised by buying things with a simple tap that we forget to stop and ask ourselves these important questions.

Being more mindful with everyday purchases can aid us significantly to break the debt cycle!

Shops are designed to make us want to spend more money. Whether it be the loud music, the vanilla caramel-scented candle wafting through the store, bright lights, styled displays or the pushy sales staff. Take a moment to stop and assess whether buying this item is going to add to your long-term happiness or take away from it.

9. Channel your excitement into your savings

Make the decision to buy things in cash going forward. By buying in cash and saving up for highly desired items you can give yourself the time to save up money gradually for it. You will be surprised how easy it can be to save for something that you really want when you know that after all that hard work you will have that item you desire – debt and guilt-free.

When you really want something, you will know if it is worth your hard-earned money as you will be making the necessary sacrifices to get it. You might start spending less on eating out each week or skipping regular drinks nights in order to save to go on that first overseas holiday.

When you save towards something you want and work hard in order to acquire it, instead of feeling a sense of guilt or buyer’s regret, you will feel a sense of accomplishment and joy knowing that you worked hard and saved for something meaningful that was going to add value to your life and that you paid for in cash. There will be no looming debt hanging over your head for months or years to come.

I can’t imagine anything worse than going on an amazing two-week holiday and coming back to deal with the debt that remains after the fun is over. It’s going to be a lot easier to be motivated to save leading up to that amazing experience than once it has been and gone and you are dealing with the debt consequences.

10. Buy what you can afford, not what you can borrow

When we bought our first home we were surprised to see how much the banks were willing to lend us. As I did our actual budget (not the bank’s budgets they use to justify lending you a huge mortgage) we could see how borrowing the larger amount was going to be a huge financial strain.

Instead, we stuck to a mortgage that would be well within our budget which will go a long way to help us break the debt cycle. This included built-in safeguards that gave us some extra financial security in case rates went up or in the event that we had to live off one income.

Only you know your true spending habits and what you can reasonably afford to pay back. Don’t let others convince you that your borrowing power is bigger than it really is. Check out the benefits of a smaller home (and mortgage) here.

11. Don’t become accustomed to the mentality of having debt repayments

I have seen this happen time and time again with young and old alike. They pay out their perfectly good car after 5-7 years of repayments and immediately start talking about what car they want next.

Even though they have a perfectly functioning car, with time on their side to save for the next one, the thought of saving up for a car over time, or having a slightly older car is considered too painful, so they go out and get another car loan.

Break the cycle! Be weird and say no to debt!

If your car is reliable and not that old and mechanically sound, it is so bad that you hold onto it for a couple of years more and save up to buy your next car in cash completely debt-free? Paying $100 or more a week for the next 5-7 years is a big commitment and is going to get old fast!

12. Reassess what you are willing to get a loan for

Be selective with what you are willing to go into debt for. Only go into debt for purchases that increase in value or are considered an investment. Getting a degree in your chosen career can lead to a higher salary, and a house can provide a return through equity.

On the other hand shopping sprees on the credit card, holidays and a new car aren’t an investment and don’t hold their value so going into debt for items like these should be avoided.

Do you want to be paying off a shopping spree years down the track after the clothes are out of style and most likely already donated to charity or sitting in the back of your wardrobe?

If you need to get a mortgage for a house that will increase in value over time, that can be considered “good debt” but a $2,000 credit card balance for some new clothes for summer is not “good debt” and should be avoided.

13. Put every spare dollar that you can towards your debt

Most people when buying their first home are signing up for huge 25 to 30-year mortgages. If your mortgage is a 30-year mortgage, it doesn’t mean that you have to wait that long to be debt-free. Aim to pay it off as fast as you can.

Are you prepared to stay in your full-time job, particularly if it is a job you don’t enjoy, for the next three decades until you are 60 to own your house? By adding an extra $50 a week to a $500,000 mortgage you can reduce your mortgage by over four years and save $65,000 in interest. A huge saving! You may think a measly $20 a week will not make a difference with your debt, but it will! And every small bit it further motivation to add more and more and is just the start of the debt snowball effect!

Imagine what you could do if you could add $100 a week to it in additional repayments! Break the debt cycle and avoid letting your bank or credit card provider dictate what your repayment timeline will be.

14. Save up an emergency fund of $2,000

Part of the never-ending debt cycle is attributed to not planning ahead. Suddenly your car dies on the freeway and you need to put $1,200 on the credit card for repairs. The hot water system goes and again you are stuck without a leg to stand on and putting that on the credit card.

Plan ahead. Budget emergencies are just as likely as the chance of rain. Find a way to save up $2,000 as quickly as you can and keep it in an account for emergencies only. This does not include a nice handbag that is on sale or last-minute drinks with friends. This is only for genuine emergencies like a break-in occurs and you need to change the locks or you have a severe toothache and need to get it looked at. Get organised and sell your clutter if you have to.

If you have to use this fund, you will need to build it up again. Next time you have a flat tyre you won’t have to panic and stress about finding the money and won’t even need to think about bringing out the credit card.

15. Prepare a budget and stick to it

Knowledge is power when it comes to finances. If you are aware of what your budget is you can be more mindful of your spending and more likely to break the debt cycle. If you know you have a $500 electricity bill every quarter start budgeting for it every week. Don’t wait until the bill comes and then try and figure out where the $500 is going to come from and end up paying your bill late with an added late fee.

If you own your home, be prepared to spend regularly on maintenance. Living week to week can put you in a bind when your home needs urgent repairs and you haven’t planned ahead and put away money for such events. Check out these Everyday Savings Tips to help kick-start your budget and free up some cash to break the debt cycle!

16. Learn to be content with what you have

Once you realise how little you need to be happy the desire to consume more diminishes. You no longer feel as big of a rush buying things. The thought of parting with your hard-earned cash will make you more mindful of what you are buying.

Learn to be content with what you have. This alone can go a long way to break the debt cycle.

Do you really need a brand new $35k car on finance on your $50k salary when your current car works perfectly fine?

Are you willing to pay x dollars every month for the next 60 plus months? In good times and bad – when you are unemployed, when you are trying to live on one income when you decide to cut back hours at work to study for a new career – that debt is going to still be there. Being in debt removes opportunities.

Maybe having that spare money each week could allow you to go on an overseas holiday each year, cut back your work hours to spend more time with your family or allow you to retire earlier. Sometimes more stuff is not the answer to contentment.

17. Find new past times that don’t involve shopping

If you are finding yourself constantly browsing online shops or at the mall, you may need to pause and recognise the habit and ask yourself – is there something more valuable I could be doing with my time? How often are you shopping, for how long and how much are you spending? Keep note of it.

Gradually retrain yourself to stop the automatic habit of logging into your favourite store’s site or browsing aimlessly on your lunch break. Think about all the things you could be doing instead of shopping; reading a new book, going for a walk, meeting a friend for coffee, learning a new skill or hobby, catching up with family, or seeing a new film.

If you have friends who you shop with regularly, make a suggestion to do something different together. There are plenty of things to do that are more enjoyable (and often free) that you could be doing instead of shopping and wasting money.

18. Review your credit card statements

In order to break the debt cycle and get your finances back on track, you need to establish where you are spending your money and wracking up debt. Check your credit card statements monthly and analyse them. When you know where you are spending your money you can become more mindful and take action to stop it. Is it at Kmart on clothing and homewares? Are you spending too much on eBay or Amazon? Are there stores you are visiting in your breaks for something to do? Is your spending occurring on the weekend because your friends work and you don’t know what to do with your spare time?

Work out where you are spending and place yourself on a ban from going to that shop or buying from that shop online for a month. Just pick one spending problem area. If your weakness is buying makeup, avoid shopping for any new makeup for that month and see how you feel after a month. Maybe you can stretch it out for two months without too much pain. Then you can add another store to the ban list until you can retrain your mindset to shop as you need things, not as a pastime or unconscious purchase.

Do You Want to Learn How to Spend Your Money With Intention?

If you want to take control of your financial future, stop stressing about money, and learn how to spend your money with intention, book in for your free Q&A call to see how Minimise With Me Financial Coaching can help you gain clarity around your finances!

You can learn more about Minimise With Me Financial Coaching services here.

What are your debt goals? Do you have a plan in place to break the debt cycle? Are you using the debt snowball method to pay down your debt? Share your goals and wins to achieve financial freedom below 🙂

Budgeting

Dave Ramsey’s Financial Guidelines To Live By

Posted on April 22, 2019

Have you heard Dave Ramsey's Financial Guidelines?

**This post contains affiliate links. If you make a purchase of a product from the links in this post I will receive a small commission, at no cost to you. This allows me to keep my blog advertisement free and support the running costs of my blog. I only recommend products I believe will add value to others and that I love myself.**

For the past couple of years I have read, listened and devoured everything of Dave Ramsey’s that I could find. I have read the Total Money Make Over, Retire Inspired and The Everyday Millionaire**, which have all helped arm me with extremely valuable financial knowledge that has given me guidelines in order to make intentional financial decisions. I’ve also spent countless hours listening to the Dave Ramsey Show to pick up on those nuggets of wisdom that weren’t in The Total Money Makeover.

If you are keen to know some of Dave Ramsey’s Financial Guidelines to Live By on making intentional money decisions and building wealth read on 🙂

Here are 13 of Dave Ramsey’s Financial Guidelines to live by!

SAVINGS

1. Sell everything you own to save up your $1000 Emergency Fund

To start your path to create wealth, the first of Dave Ramsey’s financial guidelines to live by is to sell everything you own: Some great tongue-in-cheek advice from Dave, but worthy nonetheless. You need to get your Baby Step 1 Emergency fund of $1000 saved up quick smart. In order to do this, Dave suggests you sell everything not bolted down in your home ‘:).

Sell whatever you can: your clothes, electronics, furniture, old collections, appliances, decor – whatever you’ve got to boost your Emergency Fund! You’d be surprised about how much money your clutter can make you. Let’s get it done quick! 🙂

Related reading: How I made $5000 from selling my clutter

2. Save up a 3 – 6 month of expenses Emergency Fund before buying a house

Dave Ramsey’s Financial Guidelines on buying a home always suggests you save up a 3-6 month Emergency Fund before buying a home. As Dave says, if you don’t – Murphy will move right on in. When you have a fully funded emergency fund before buying a home you are well placed to deal with emergencies as they come up. If your car breaks down, you need to replace the water heater or pay your insurance excess after a storm – there is no need to panic, you’ve already got a good buffer between you and Murphy.

By all means it will delay your dreams of home ownership by a few months but when you have that piece of mind, that if anything goes wrong you can ride it out, you’ll be glad you did!

You can read more about the Dave Ramsey Baby Steps Here 🙂

3. Don’t invest your Emergency Fund

Every time I hear about anyone talking about trying to invest their Emergency Fund I cringe! As Dave Ramsey’s Financial Guidelines say, this fund is not to be considered an investment and not there for the purpose of making you cash. It is there purely to give you liquid funds in the event of an emergency, a time when you might need cash immediately. You don’t want to go to use your emergency cash that you invested, only to find that half of it has disappeared.

The best you can do is find a good bank with a decent interest rate on savings. Keep your investing funds completely separate. One day you’ll be glad you did!

CARS/VEHICLES

4. Things with motors should add up to less than half your annual salary

Another amazing piece of advice from Dave Ramsey on vehicles. Dave’s rule is that you should never own more than half your household annual income in things with motors in them – that go down in value. This being cars, motor homes, motor cycles, boats and so on!

If you earn $80k and own a $55k truck you have too much money tied up in depreciating assets. You want your money invested in ways to grow it – not eat it up!

Combined Vehicles

Household income > 50% = TIME TO SELL!

Take an assessment of your current vehicle values and add them together. If the total of your vehicles values over your household income is more than 50% of your income it’s time to sell them!

5. Don’t spend more than your car is worth to repair it

One of the best pieces of advice Dave has given on The Dave Ramsey Show is how to know when to repair or replace a car. Dave says to research the market value of the vehicle and not to spend more on the vehicle in order to get it repaired than it’s market value is. For example; if your car is worth $2000 but needs $3000 of repairs you would just sell it.

This is just a guideline to know where to draw the line in the sand on whether to repair a vehicle or not. If you really love the car and it won’t cost much more than the market value to repair it you might be able to still fix the car and keep it but just be ready to let the car go if it is significantly more.

Of course don’t forget to shop around for repairs and get a second opinion which might save you some serious cash and allow you to keep the car after all!

Related post: How Much is Your Car Really Costing You?

HOME BUYING

6. Only buy a house at 25% of your salary or less

Dave Ramsey constantly refers to how people who win with money are debt free including their home. When you don’t have any payments in the world you can make huge steps to build wealth. This is why Dave recommends only getting a mortgage at a max of 25% of your salary.

When you spend more than 25% of your salary on your housing you are minimising what is left to cover other bills, insurances, spending money to enjoy yourself and your savings ability.

Keep your financial stress low by limiting your housing costs to below 25% of your household income.

7. Buy investment properties in cash

There are always people spruiking get rich quick ideas around real estate and borrowing yourself into oblivion.

Dave’s Real Estate approach takes patience and more time to carry out but it covers you for all market conditions. Dave’s advice on Real Estate is to save up for real estate investments in cash! As Dave says, if the market drops or you can’t find a tenant for 6 months you can weather out the storm. Unlike the investor who decided to buy multiple properties with large mortgages who won’t be smiling so much if the market drops.

DEBT

8. Avoiding Student Loans

Dave often reports these words on the Dave Ramsey Show ‘I’ve never told anyone to go into student debt’. But how do you pay for university without student loans?

Here are some wise suggestions from Dave Ramsey to help you avoid going into student debt:

Start your study at Community College (or TAFE in Australia). These education institutions are a lot more affordable and can give you credits for university study. I saved myself thousands of dollars in student debt by doing my Advanced Diploma in Accounting at TAFE for two years before heading to uni. By the time I got to university I had only 13 of 24 units left to complete of my BA (Accounting) thanks to my advanced standing credits. TAFE at the time I studied was $4000 for the Advanced Diploma vs $800 a subject at university which saved me approximately $6000!
Study locally so you can live at home or save on interstate fees.
Go to a less prestigious university. The bigger the name of your uni, the more you are going to have to pay to attend. Unless your parents have offered you a blank check book (and they can truly afford it) attend more affordable universities.
Save up ahead of time for your student loans. If you have kids you should be saving ahead of time to help them study at university debt free. Investing $10k when your child is born and adding just $100 a month until their 18th birthday could grow to $78,000 thanks to the magic of compound interest (with an average 7% return rate), ready to cover their education costs debt free.
Apply for scholarships to help you pay for some of the cost of university. The more you apply for, the more change you have of qualifying.

If you don’t have any financial help from your parents you can do the following to avoid student loan debt:

Save up as much as you can before you start university.
Considering getting an Internship/Cadetship that will cover your study expenses whilst also training you up in your chosen field.
Whilst you study, get a job or a side hustle to pay your fees as you go or work like a crazy person during your study breaks. Work out how much you need for the next semester and divide that by how many weeks you have to save up to give you an idea of how many hours or shifts you’ll need to take up.
Buy second hand text books and sell the prior semester to help you cover any new ones. At $100 plus a pop this can make for some huge savings!

9. Save up and make a cash settlement offer on old debt.

If you have an old debt sitting around that you haven’t make a payment on since who knows when, save up some cash and make them a cash offer on the remaining balance. Dave Ramsey suggests some you might be able to make a cash offer of 5c on the dollar. But even if they will only take 25% of the balance, you are still making a lot of headway!

Don’t forget as Dave recommends to get the offer in writing stating that this will settle the balance in full and close the account and do not give electronic access to your account to the credit company. Write them a cheque. Some very wise words from, Dave!

10. When it takes longer than 2 years to be consumer debt free

Dave Ramsey suggests that if you will take more than 2 years to pay off your remaining consumer debt that it is time to get selling. You can either hustle like a crazy person or bail yourself out by selling the car/s, boat, investment properties or your home. Do the rough math as Dave does on his show and work out a rough time line for your debt repayment. If it’s much longer than 24 months, for you sanity it’s probably time to get selling!

RAISING KIDS

11. Pay your children for chores as they are completed

Dave recommends paying your children as they compete tasks in order to show them the direct link between work and being compensated rather then waiting for the end of the week.

Make some chores family duties. Don’t pay your kids for every finger they lift. Make some chores mandatory and uncompensated, to be done for the good of the family such as, setting the table, feeding pets, washing up or making their bed.

12. Support your teenagers in making decisions about their education

Dave Ramsey’s Financial Guidelines include preparing your kids for the future. Don’t leave your teenager on their own to make huge life decisions about their future. Help them to work out what they are good at and passionate about and identify potential career paths.

Research salary averages with them based on level of education and time spent in the industry so you can see a direct link between career path and future income. Weigh up what level of education is needed to achieve that chosen career path and map out a plan with them, where they can afford to study, what course they need to get into their chosen field and how the fees will be paid.

Ensure you consider whether it is worth the investment into a uni degree. Don’t allow your teenager to go into $300k to get a Chiropractor degree if they can only earn $60k-70k. Be sure to shop around for reasonable return on your investment.

13. Teach your kids to Give, Save and Spend

As Dave always says: Live like no one so in the future you can live and give like no one. Starting to teach your kids this well before they leave the nest will help you raise “financially well rounded” kids.

You will hear these three scenarios repeat themselves on The Dave Ramsey Show with callers.

Some people are extremely generous with their money, and lend money they don’t even have and find themselves in their own financial pickle.
Others callers are avid savers and feel extreme guilt over spending anything on themselves even once they achieve financial freedom or Millionaire status.
Then there are the spenders who leave not one dollar to be saved and go beyond and find themselves in ballooning consumer debt.

None of these are ideal financial habits and all can lead you into being taken advantage of, not leading a full and happy life and being miserable and swamped with debt. You can teach your children to have a healthy relationship with money and giving, spending and savings and help them learn valuable skills for when they hit adulthood and save them the troubles that come from not having a good balance.

A great way to do this is to encourage them to split their chore money or anything else they earn into 3 jars: Give, Save and Spend.

It’s a great way to teach them to be kind and compassionate for those who are less fortunate, to teach them that not every dollar should be squirreled away – they need to enjoy some and to not whittle away every last penny either.

[Photo: Michael Longmire @ Unsplash.com]

This weeks comment question: Which of Dave Ramsey’s Financial Guidelines have help you be more intentional with your money?

If you found value in this post I would be super appreciative if you could share it with others who might also find value in it 🙂

Budgeting

How to Plan a Debt Free Christmas

Posted on November 27, 2018

Check out these 8 Ways you can Plan a Debt Free Christmas this year!

Christmas is a time to be with loved ones and make memories together. But often before you know it, the end of the year has crept up again, and you are facing the stress of thinking about how you are going to afford to buy everyone gifts.

With pay options like After Pay and Zip Pay on the radar, it’s even more tempting to just ignore the impending budget hit and charge those gifts and leave the worrying about paying them later. Or not worrying at all and ignoring your growing credit card debt until it becomes a bigger problem.

According to a new forecast of Reserve Bank of Australia (RBA) data analysed by finder, Aussies borrowed a combined $29 billion on credit cards in December 2017. That breaks down to an equivalent of $1,727 in purchases per card. This is up from the $1,666 the average cardholder owed in credit card debt after the Christmas period in 2017.

These are pretty worrying statistics with 5% of Australians admitting to taking more than 12 months to pay off their Christmas credit splurges! Think of the interest! An average $1727 spent per person at a 22% interest rate paid off over two years adds an additional $375 in interest payments.

Table above shows Total payable inclusive of interest on $1727 borrowed at 22% over 4 and 2 years, respectively.

Christmas shouldn’t and doesn’t need to be a time of financial stress or an excuse to go into more debt. With a little planning we can take the stress and financial sting out of Christmas and plan a Debt Free Christmas. And a little planning and effort can go a long way!

How You Can Plan a Debt Free Christmas

1. Make a promise to yourself that you won’t be going into debt for ANY gifts
Let’s all take a moment and think about this. If you don’t have the money in cash to buy gifts and are going into debt to buy them, you can’t afford it. This goes the same for if you don’t have an Emergency Fund of at least $2000 saved up. Until you acknowledge this you will continue in a debt cycle and never catch up.

Family may be upset at your lack of generosity, but it’s important to stop digging your financial hole more into the ground in order to keep others happy. And besides, family and friends should always want to support you in achieving your goals! And as Dave Ramsey says, Live like no one else, so you can live AND GIVE like no one else 🙂

It may take having a year off buying anyone gifts to get onto your feet and build up a small Emergency Fund and pay down some debt but it’s a necessary step in order to change your financial situation. And don’t fret I will give you some tips on how to still give gifts below 🙂

2. Save ahead of time with Sinking Funds
The number one thing you can do to have a debt free Christmas is to save ahead of time with Sinking Funds. This means saving up a little each month rather then trying to scrounge dollars at the 11th hour. The best time to start is January. This will give you 11 months to save and you will have your total budget by Dec 1st.

Every January I want you to set your Christmas budget. How many people do you have to buy for? What are you going to spend? What do you need for Christmas meals/entertainment? Divide that total number by 11 and put this away every month. Check out this Christmas Gift List to help you get started. When Christmas rolls around you will have the cash ready to go without any temptation to reach for that credit card.

3. Shop early
Don’t leave your Christmas shopping for a week or two out. Take advantage of earlier sales like Toy sales or Black Friday deals in late November. When you leave it to the last minute you don’t allow yourself time to shop around for the best deals, which can save you serious cash! Shopping early also gives you ample time to check reviews and ask around for other people’s recommendations to make sure you are buying a good quality item.

4. Shop second hand
Before buying brand new check for second hand items that can save you money. I just bought a second hand Wii game in very good condition for $26 and saved myself $20. Sometimes you can find second hand items for half the price or less that are brand new with tags attached or like new.

5. Have a Cris-Cringle
A great way to save money is to set up a Cris-Cringle and buy one gift rather than a gift for each person. Not only can this save you money, and allow you to buy a more quality gift but it will save you time shopping for multiple gifts. A friend of mine’s family has a $75 budget and each person makes a list of three items within the budget they would like which means that you can by a gift that will truly add value to your loved ones life!

6. Gift frugally

If you are really short on cash and considering going into debt to buy gifts STOP. Just because you don’t have much money doesn’t mean you have to resort to going into more debt. Get creative and think about what home-made gifts you can make or consider gifting your time!

Can you draw a portrait for your loved one?
Are you handy and can offer them some of your time to help with repairs?
Can you offer free babysitting?
Are you a good baker and can bake some cookies or put together a yummy hot chocolate pack?
Or make some DIY beauty products?

Think outside the box. Gifting a hand-made gift can be more appreciated than the store bought one.

7. Get Hustlin’
If you are short of cash spend the month leading up to Christmas hustling for some extra cash.
Here are some ideas to help you bring in some extra cash to put into your Christmas budget:
• Start dog walking
• Babysit for cash
• Check our Air Tasker for some odd jobs you can do
• Sell your unwanted clutter on eBay, Facebook Marketplace or Gumtree. Read how I made $5000 selling mine here
• Rent out a room on Air BNB for the weekend
• Ask for extra hours at work for the holidays
• Cut your expenses: review your mobile phone plan, lower your grocery budget and start Meal Planning, find frugal ways to have fun to save on entertainment, check your mortgage rate and ask your bank for a better deal

8. Aim to save when it comes to food
Christmas isn’t just about the gifts, the food can add up especially if you are hosting. Here are some tips to plan a debt free Christmas and save money on food:

• Shop at Aldi. I’m a massive fan of a lot of Aldi’s range it’s a great way to save.
• Take advantage of specials. In the lead up to Christmas browse the supermarket catalogues and buy non-fresh items on special that you will need for Christmas.
• Ask everyone to bring one dish to help share the cost of food on the day. Make a list of what you need and ask around who can help make something. Every year I make a pavlova to bring along to Christmas lunch and dinner.
• Rotate Christmas with your family. Spread the cost of Christmas by rotating who hosts it each year. It also means instead of hosting Christmas every year you might only need to host it once every 3-4 years. Think of the reduction in stress levels 🙂
• Spend time estimating food as best as you can. Try not to go crazy and buy food for 50 when you are only having 30 guests. Take note each year or how much food was left verses what you bought for an indication of what you will need next time.
• These tips on How to Save on Your Grocery Budget will help your dollar go further too!

And there you have it Minimisers, 8 tips to Plan a Debt Free Christmas!

This weeks comment question:What are your tips to save money at Christmas and celebrate Christmas Debt Free? Let me know in the comments

[Photo: Tyler Delgado @ Unsplash.com]

If you found value in this post I would be super appreciative if you could share it with others who might also find value in it 🙂

Budgeting

My Top 5 Personal Finance Books

Posted on November 6, 2018

Today I wanted to share with you my My Top 5 Personal Financie Books. I am a huge fan of reading and although I don’t get a lot of time to catch up on my wish list of books to read I do try and get around to reading one book every month. It’s not a huge number and nothing to brag about (I’ve seen some people on Insta do 12 a month… WHAAAAT) but I do make an effort to learn and grow and one of the best ways I have found to do that is to read a lot of different books.

Over the past handful of years and as I discovered new passions like Simple Living and the F.I.R.E movement, I have come across many amazingly educational and helpful books across many topics ares: Minimalism, Finance, Consumerism, Millionaires and Simple Living to name a few of my favourite subject areas. As an Accountant and CPA it wouldn’t come across all that strange for me to love reading about Personal Finance but I think there are so many amazing books out there now that anyone can learn from and enjoy and I promise you they will not put you to sleep. Far from it, I think they will do wonders to motivate you to pay down debt, develop new spending behaviours and learn about the big world of personal finance without having to take a three or more year degree.

And so here I will share My Top 5 Personal Finance Books with you in the hope that they will add value to your life and inspire new habits and help you on a path to financial freedom and building wealth!

My Top Five Personal Finance Books

5. I Will Teach You to Be Rich, Remit Sethi

I am a huge fan of Remit’s after a friend recommended me his material and loved his in your face attitude and unapologetic views on spending in his Book I Will Teach You To Be Rich. He goes as far as having a Stupid Mistakes Fund for unexpected expenses like fines and explains how you can prepare for big life expenses like weddings by thinking well ahead and saving up over the longer-term. He delves into his investment choices and why he believes index funds outperform their higher fee counterparts. And gives valuable advice on how to haggle on cars and other big purchases ‘like an Indian’ without wasting your time. If you’re someone who prefers a less prescriptive finance guru who doesn’t spout cut up your credit cards and count every last cent and someone who has a bigger picture approach to finances that won’t make you cut out your daily coffee, this book is for you.

4. The Millionaire Next Door, William D. Danko

Like most people, I am fairly fascinated by millionaires so when Mr J. Money at Budgetsaresexy.com recommended this one I had to satisfy my curiosity – How do Millionaire’s live (do they know things let’s find out – Bojack Horseman anyone ;))? Don’t we all want to know that?

This book was based around research conducted over 20 years about the spending habits of millionaires from their car buying habits, where they live, how they invest, what they wear and so on. It also delves into ‘entitlement syndrome’ and how to raise self-sufficient kids who don’t expect everything handed to them on a platter from the bank of Mum and Dad. Great for any Mum’s and Dad’s out there!

It also details the spending habits of PAWS and UAWs (Underaccumulators of Wealth) and the difference in their spending behaviour. If you are keen to achieve millionaire status, or just are a little curious about how your undercover millionaire lives their life check out The Millionaire Next Door.

3. Your Money Or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Fully Revised and Updated for 2018, Vicki Robin and Joe Dominguez

This was the book I was looking for my whole life, and I only just finished listening to it THIS MORNING. I heard Mr Money Moustache mention it as a top recommendation a few years back but it took me this long to get a copy and read it. But it was well worth the wait.

Your Money or Your Life was originally published in 1992 but was re-released in 2008 and 2018 with the addition of a foreward by none other than Mr Money Moustache himself, to be more relevant to today’s financial climate. If you are a finance nerd who loves spread sheeting, tracking every dollar and aspire to F.I.R.E. (Financial Independence, Retire Early) this is a book that can give you a thorough plan.

It’s based around the 9 steps Vicki and Joe used to become financially independent and the concept of trading your life energy for money. And has some amazing crossover if you love topics on Minimalism, Side Hustling and Frugality. This book touches on everything you can think of: how to invest your money, aligning your values with career and investing, ways to save money and live a more meaningful life and earning more. It provides you with the tools to track your income vs expenditure and your passive income as well as calculating your Net Worth.

If you are keen to make your money work for you and get your time back and want to get even nerdier with your budgeting approach and learn about investing this book is a great place to start.

2. The Total Money Makeover, Dave Ramsey

I first heard of this book about three years ago now and was the first personal finance book I read on my finance book binge. As I read it something just clicked inside of me, as if Dave was saying the words I had been thinking all along – I hate debt and I want out! His reference to #gazelleintensity just described my attitude to debt in a matter of two words – RUN FOR YOUR LIFE.

The Total Money Make Over is based on the 7 Baby Steps and give a clear cut plan on how to get out of consumer and mortgage debt and build wealth. If you are sick of living week to week and can’t take the stress of another financial emergency this book could seriously change your life.

Dave has some amazing principles on spending and approaching debt that can unwind you from even the most stressful financial situations without the need for bankruptcy but definitely with a bit of sacrifice – on a rice and beans level. If you are sick of debt please read this book today, you won’t be able to put it down.

1. The Barefoot Investor, Scott Pape

As an Aussie lover of finance, there was no way I could look past our own homegrown finance guru Scott Pape with his recent book The Barefoot Investor The Only Money Guide You Will Ever Need. If you want a finance book which won’t bore you and that can get your partner involved in the conversation this is it! The Barefoot Investor is based around Date Nights with your partner where you tackle different financial areas from Health Insurance, Superannuation, your Mortgage, growing your Wealth and Retirement.

A great one for people who get the chills thinking about budgeting, Scott’s bucket system is simple and easily implemented by even the most novice people. If you are an Aussie as well you can’t go past a recent book that focuses on the Australian related finance space and there is not one 401k or Roth IRA section for you to skip over 😉

And there you have it guys My Top Five Personal Finance Books to get you started on your #debtfreejourney and path to building wealth!

What are your favourite Personal Finance Books? Let me know in the comments, I am always keen for new recommendations! 🙂

[Photo: Sharon Mccutcheon @ Unsplash.com]

If you found value in this post I would be super appreciative if you could share it with others who might also find value in it 🙂

Budgeting

13 Realistic Tips to Pay Off Your Mortgage Faster

Posted on October 30, 2018

Paying off your mortgage doesn't have to be miserable. Check out these realistic saving tips to pay off your mortgage faster.

I’ve listened to hours upon hours of financial advice from finance gurus like Dave Ramsey, Scott Pape and Chris Hogan and the one thing that gets repeated again and again is the importance of paying off your debt so you can start building wealth. This is simply because when we don’t have any repayments we get to keep our pay cheques. Sure there are still bills to pay bills will always be there, but when you have no debt: no credit card repayments, no monthly car repayments and you own your home you have more of your pay to keep and to make your money work for you. And with the most recent rise in mortgage interest rates which are predicted to keep going up after a long stint of interest rate drops, it’s extremely important to try and pay off your mortgage faster whilst the times are good.

Let’s imagine this following scenario.

You buy your first home when you turn 30. With a 30 year mortgage term you are going to be putting a large chunk of your pay, often more than 25% of it towards towards paying off that mortgage until you are 60.

Imagine if instead of paying your mortgage off in 30 years you could bring it down to 15 years and own your own home by 45 instead of 60. And if you buy your home later in life, or through other circumstances you didn’t get to pay off as much of it as you would have liked, think of how great it would be to own your home before retirement. Future you is going to be super happy with you.

There are many financial and lifestyle opportunities that open up when you not longer have to pay off a mortgage. These include:

Being able to reduce your workload from full-time down to part time, or completely changing careers to something you love even if it doesn’t pay as much as your last job.
Being able to retire early
Eliminating a house or rent payment altogether from your budget
Being able to travel to your dream destinations
Having the extra cash to help your kids with college
The freedom to spend more on you

Who wouldn’t want those things!

But I want to have a life now!…

I often hear people say they’d rather enjoy their life whilst they are young then worry about debt later if at all, but this doesn’t have to be a one or the other scenario. Paying off your mortgage doesn’t mean having no life for the next ten to fifteen years. It’s certainly possible to find a balance between enjoying life and paying off your mortgage. It certainly won’t be without it’s sacrifices, but if you get a little creative and focus on some savings methods that don’t require you to miss out on anything such as making sure you are getting the best interest rates available you can get that mortgage paid off with much less pain than you think. Let me help you with how.

Check out 13 Proven Ways to Pay Off Your Mortgage Faster so you can have a life and be debt free – house and all much sooner!

13 Realistic Tips to Pay Off Your Mortgage Faster

Make extra weekly repayments

Unless you want to spend the next 30 years or so with a mortgage, and paying for your house three times over with interest added on top, don’t settle for paying the minimum repayment on your mortgage. It is as it indicates, only the minimum you should be paying. Every little bit extra you can throw on top adds up.

Even if you don’t have much to add to your minimum repayment minimise what you can in your budget and redirect that money to your mortgage. Check out these tips to save money and my eBook 101 Ways to save money for ideas on how you can free up some money in your budget to pay off your mortgage faster.

On a $400,000 mortgage at 4% with a 30 year term, and extra $20 a week shaves off $26,367 in interest and 2 years and four months. Throw $50 a week on top of the minimum and that increases to a saving of $57,555 and 5 years and 3 months! Those are some serious time and cash savings! You can calculate your own repayments with this awesome calculator here.

Don’t forget to pay your mortgage weekly, over monthly to save again on your monthly interest.

2. Utilitise all extra money
One of the best ways to pay off your mortgage faster is to utilise those lump sums. Instead of buying a new TV with your tax return, bonus or any other sums you come into, take that chunk of cash and use it to smash down your mortgage term. Tax returns, bonuses, inheritances, gifts and so on can go a long way to reducing your mortgage balance.

Again life doesn’t have to be miserable to get ahead, if putting all your bonus feels too torturous, that’s fine you can still treat yo’self a little, take 10% to spend on something you want or need and put the other 90% on the mortgage. Or work out a split that works for you and make it a habit. Keep in mind that it’s helpful if you can throw any lump sums you get onto your mortgage as early as you can. This will knock the interest bill down much faster.

Check out how the Debt Snowball can help you get debt free faster!

3. Avoid adding to your mortgage

It can be very easy to gradually increase your mortgage over time. You start with your first home, five years later and with a couple of kiddies you decide your humble abode isn’t big enough and you take on a bigger mortgage. Next you’ve refinanced your mortgage for a new car and a kitchen and bathroom reno. Before you know it your mortgage is more and more difficult to get on top of. Refinancing can be a slippery slope where it become too easy to just refinance every must have into your mortgage and make it that much harder to pay off.

Instead, save up cash to pay for repairs or upgrades to your home or at least make sure that your new mortgage repayment is still within the 25% of your after tax income range. With that threshold in mind you can avoid letting your payments get over your head.

4. Sell your unwanted stuff

If you are finding your home is getting a bit cluttered, make some space and some extra cash to pay off your mortgage faster by selling your unwanted stuff. You’d be amazed by what money you can bring in from treasures collecting dust in your home. Check out how I made $5,000 selling my unwanted clutter here.

5. Stick to a budget.

“A budget is telling your money where to go instead of wondering where it went.”
― Dave Ramsey

Wise words from Dave Ramsey. If you don’t know where your money is going you aren’t going to be able to spend it with intention. By sticking to a budget you can make sure you are spending money more efficiently which leaves more to throw onto your mortgage. You can then go even further once you’ve got the hang of a budget, and transfer any spare cash in your monthly budget that you didn’t end up spending such as unspent grocery money to put on your mortgage. Every dollar counts.

6. Get creative with fun

Having a goal to pay off your mortgage doesn’t mean that life has to be boring. Find free or affordable ways to have fun and stretch your dollar. Make a three course meal at home instead of going out. Look for vouchers and online deals for activities to get buy one get one free offers or other discounts. Go for a walk with a friend instead of getting a coffee. Ask family to buy your kids memberships to the museum or zoo in place of other gifts so you have free entertainment all year. Learn to appreciate things in life other than shopping and eating out. There is plenty of free fun out there to be had 🙂

7. Take advantage of Mortgage Offset Accounts

Offset accounts are a great way to reduce your mortgage interest bill without having to actually pay the money on your mortgage. When you are picking a home loan make sure to find one that has a 100% offset account to save you on your monthly interest bill.

The way it works is, any money you have in the offset account linked to your mortgage will offset the interest you pay on your mortgage. So if you had a $200,000 mortgage and you had $10,000 of savings in your offset account, the interest on your mortgage would only be applied to $190,000 of the mortgage not the full balance.

With saving accounts interest rates around the 2.8% mark versus mortgage rates around 4% it is a great way to get more bang for your buck. An added bonus, as the debt savings are not income it’s tax free savings.

So let’s say continuing from the example above, you had $10,000 saved for an Emergency Fund and your mortgage rate was 4%. By letting that money sit in your offset account, you would reduce your interest bill by $400 a year. If you had put it in a savings account paying interest at 2.8% you would have only made $280 in interest and would have to pay tax out of it.

If your current mortgage doesn’t come with an offset account shop around for a better home loan that does include it so you can tap into those amazing savings!

8. Review your interest rate regularly
There are huge savings to be had from your interest rate alone. If you aren’t checking yours against your banks competitors regularly you are potentially missing out on savings of thousands of dollars per year and tens of thousands over the life of the loan.

A $400,000 home loan with a 30 year term at 4% is $440 a week versus $467 at 4.5%. If you were paying the higher rate you would be missing out on a whopping $1404 a year in interest savings. And if you are paying a much higher rate then advertised you are losing out even more.

If you find your banks rate isn’t a competitive rate or they are offering new customers a better deal call up and ask them for a better interest rate. Do your research first. If they won’t budge, consider switching banks. Don’t reward banks that are doing their best to rip you off. Finding a mortgage that is a better rate let’s you pay off your mortgage faster without you having to cut back your budget to do so.

And if your bank charges you a monthly fee for your mortgage if might also be worth changing. A $10 monthly fee might not seem like a drop in the ocean but if that $10 monthly fee was invested at 8% over the same 30 year term you could have had $15003. Doesn’t sound so small now 😉

9. Get motivated

One of the most helpful things that will help you pay off your mortgage faster is to get motivated and in a mindset to smash that debt. Even if you don’t know anyone who can support you in person you can always find others who are tackling similar goals in trying to pay off their debt. These are just a few ways to get yourself motivated to tackle your mortgage and help you stay focused in your financial goals:

Take notice of the interest you are charged each month. Instead of feeling bad about how high it is, watch it decrease month to month.
Calculate how much of your original mortgage you have now paid off as a percentage. (Original Mortgage-Current Balance)/Original Mortgage = What % you have paid off.
Print off a Mortgage chart at Debt Free Charts to colour in each time you hit a new goal.
Look at how much interest offset you are receiving each month thanks to your offset account. This will also encourage you to save rather than spend your money so you can save on even more interest 😉
Check out Dave Ramsey’s #debtfreescreams segment on YouTube for inspiration and to see how other people just like you finally paid off their debt or mortgage.
Get some support behind you. Find a friend, family member or your partner so you can hold each other accountable and motivated each other.
Check out the #debtfreecommunity on Instagram for other people who are in the process of repaying their debt tips, advice and motivation to keep you on track.
Read books like Scott Pape’s The Barefoot Investor and Total Money Makeover by Dave Ramsey to help you with developing a plan to tackle your debt.

10. Increase your income
Find out what you need to do to increase your income outside of side hustling and doing overtime. If you complete a course can you get a promotion? Can you get a new position with further study? Can you smash your KPIs at work and get a good raise or make the EOY bonus? Maybe you could find a better paying job if yours doesn’t offer any salary increases or opportunities for a promotion and negotiate a much higher salary at the interview.

11. Get #Hustling.
If getting a raise from work isn’t on the table at this moment, get creative and find ways to bring in more income. Other than selling your unwanted stuff, there are many other options to bring in more money. Consider taking on more overtime when you can, or take on a second job, even if it is just temporarily. It doesn’t have to be something mind numbing, use your talents. If you are an artist or good at crafts sell your work on Etsy, if you are a teacher or can teach anything you can tutor or coach on the side. Pick up some work on sites like Airtasker if you have some spare time or rent out a spare room on Airbnb to bring in some extra cash. You can even get paid good money for walking dogs, talk about winning if you love the outdoors and dogs!

The more you earn the more you have left over after expenses and can inject that straight into your mortgage.

12. Stop lifestyle creep
Do you remember a time when you easily lived off a small wage in your early 20s? With each pay rise you grew accustomed to earning that higher amount in a matter of a few weeks. Before you knew it, it seemed like your pay rise had disappeared and you didn’t have any extra to save or pay onto debt.

Instead of allowing lifestyle creep to happen, give yourself a reasonable amount to spend each month and resist increasing it each year. You’d be surprised how quickly you get used to spending a limited amount once you develop the habit.

The next time you get a raise, instead of absorbing it into your lifestyle and increasing your spending allowance, I want you to take the exact amount or your new raise each pay period and add it to your mortgage repayment. By all means if your bills increase since them update your budget to reflect that but anything left over can go straight to the mortgage. With each year and each pay rise your repayment should continue to grow!

13. Determine if you can afford your mortgage
If your mortgage is more than 25-30% of your after tax salary you are inevitably going to have a limit on how much extra you can add to your mortgage to pay it off earlier. If you’ve tried all of the above tips and still are struggling to make ends meet or are worried about how you will meet future repayments or interest rate rises this might be the time to consider whether you can afford your current home.

If you do the math and realise that you are can’t afford your keep your home, selling it might be a blessing in disguise and a fresh start. You can use any left over cash from your home to pay off your mortgage and potentially other debts you have and rent an affordable place for a year or two. You can then use that time to save up for a house deposit and start again in a couple of years with a much more manageable mortgage.

Being stressed to the eyeballs day in day out to keep your home is no way to live. And in the mean time whilst you save up for a new home, you can work on getting your income up ready to help you tackle a new mortgage in the not too distant future.

This weeks comment question: What are you doing to pay off your mortgage faster? Let me know in the comments below 🙂

[Photo: Bethany Opler @ Unsplash.com]

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