Budgeting

By driving down your borrowings, your earnings can be invested for longer-term wealth creation. Here are seven ways to pay off your debt faster.

Make a list

Record all debts, noting amount, rate of interest and whether debt is tax-deductible, says Anne Graham of McPhail HLG Financial Planning. It’s nonsense to focus on debts with no tax deduction (credit card and home loan). Being debt-free is better than a tax benefit.

Prioritise

Pay off non-deductible debt with the highest interest rates first, says Suzanne Haddan of BFG Financial Planning, and work your way down. That’s probably credit card debt – where rates can be as high as just under 21 per cent. When it comes to reducing deductible investment loans, look at whether you’d be better off salary-sacrificing more into super.

Start small

If you have a number of credit cards and are feeling overwhelmed, Graham says, start with the card with the smallest balance. Take a $3000 debt on a card charging 18.5 per cent – paying $300 a month will nail that in 12 months and save interest of $8625.

Power down your mortgage

Round up repayments, broker Mortgage Choice says. On a $350,000 loan over 30 years, monthly payments of $2329 rounded up to $2500 will repay the mortgage four years early and save $69,200. Or pay fortnightly as it’ll mean an extra month’s payment a year. Consider an offset account – on a $350,000 loan, $5000 in a full offset account will reduce the mortgage by 14 months, saving just under $34,000.

Focus on investment debt

Review loans regularly to ensure rates are competitive. If you have a margin loan, you’re generally paying 2 percentage points more than on a loan with your home as security. Plus, adds Graham, you’re reducing your risk of a margin call by moving to a different loan.

Wean yourself off the ‘residential ATM’

If you are borrowing against your home for investments or to pay for other things, be careful to make extra repayments otherwise you’ll find that you are not making inroads into the principal loan but are just keeping up with interest payments.

Stay disciplined

If rates go down, continue making the same repayments. Where you’ve worked hard to pay off multiple credit cards, don’t fall into bad habits and apply for new cards. High earners, says Haddan, are particularly prone to ignoring budgets and spending as much – and more – than they earn.

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