Pay off Debt Faster

Paying off debt as quickly as possible is something many of us aspire to.  It does depend on the debt, so this more applies to debt that is incurred for "things" that don't earn you income or provide a capital return when the price/value goes up.

The "Snowball Your Debts" approach can work one of two ways:

1. List out all your debts, from the smallest balance to the largest.  Then, while paying off the minimum balance on all the other debts, pick the debt with the smallest balance and pay extra on that each month until it is gone.  Then move onto the next smallest debt on your list and keep going until all you're left with is your mortgage (if you have one).
2. Again, list out all your debts, but this time in order of the debt with the highest interest rate to lowest (your mortgage is likely to be the lowest interest rate, so will be at the bottom of your list).  Then, while paying off the minimum on all the other debts, you hammer the debt with the highest interest rate until it is paid off, and then move on to the next highest interest rate debt on your list.  And so on and so on.

The big proviso here is to make sure that you then close the accounts and cut up the cards for all of that debt you have paid off, and try not to use anything like this again.  In other words, stick to your budget and/or live within your means.

If you can, you could also consolidate your personal debt into your home loan (which has a lower interest rate) and then again close all those other accounts.

Paying Off Your Mortgage Faster

 Then comes how to pay off your home loan fast.  The main 3 ways to do this are:

1. Use tax refunds, bonuses and any other kind of financial windfall (including inheritances and gifts) to pay down your mortgage
2. Pay extra repayments each time
3. Pay fortnightly instead of monthly - see more on this below.

Here is an illustration of how the last 2 points operate in an example.

In the example below, the loan is for $500,000 and the interest rate is 6% per annum.  The minimum monthly repayment is $3,232 for a loan over 25 years.

By increasing what you pay each month to $3,500 the loan term is reduced to 21 years, instead of 25 (saving you 4 years' worth of interest payments).

Then, by paying this $3,500 fortnightly (so, $1,750 each fortnight), it FURTHER reduces the term of the loan by another 3 years, down to 18 years.

PLUS, you save an additional $62,714!

It's well worth looking at your budget to see how you can make this approach work.