Grow Your Wealth through Good Debt Management

Expert Advice with Sam Saggers 5/09/2016

Do you manage your debt...or does it manage you?
Uncontrolled debt can put the brakes on your portfolio’s growth so it’s important to manage your debt well.
Now savvy investors know that there are essentially two kinds of debt; good and bad. Debt that is defined as “bad” is that debt which doesn’t afford us the opportunity to recoup our expenses through tax deductions.
As an example, bad debt includes not only credit card and personal debt, but mortgages against our principal place of residence.
On the other hand, investment properties provide not only an income but also tax benefits.
So then, obviously it’s a smart thing to reduce or eliminate said bad debt.
There are a number of ways to do this and there’s no one “right” way. The best method is the one that fits with your personality, lifestyle and financial situation.
Choose your weapon
Debt repayment plans
Obviously, the simplest way to get out of debt is to pay it back.
The most important thing about this kind of debt elimination plan is to stay motivated. Motivation is what will take you to the finish line.
Snowball method
If you’re the kind of person who loves to see fast results, this may be the type of repayment plan you need.
Pretty simply, you pay off your smallest debt first then work up to your largest. Each time you pay off a debt you add the monies you were paying for that debt to the next highest one, repeating the process until all of your debt has been wiped out.
This method offers  a strong psychological boost to keep going, even if you end up paying more interest.
Avalanche method
If you’re more keen to pay less interest, this could be the strategy for you.
Simply add a set amount (e.g. $50) to your debt repayment amount, starting with the highest interest obligation. So for example, let’s say your monthly payment is $150. You’ll pay $200 each month until that bill is paid off.
Repeat this strategy, working your way down the interest ladder until all of your debts have been eliminated.
    Debt consolidation
Consolidating your debts should reduce the interest you’ll pay...that’s the point of it.
Structure your debt consolidation so that once you’ve paid it off you’ll have paid less interest, even though you’ve stretched out your payments for a longer period of time.
Consolidate your bad debt under one loan and your home loan under another. After all, you don’t want to pay 30 years on your credit cards!
Reduction or revision
Reduce your outstanding balances by negotiating with your creditors and/or transferring your balances to a card with a lower interest rate. Use the difference to pay extra cash towards your debts.
Revise your repayment dates so that they align with your payday. This will almost guarantee that you won’t spend your extra repayments. This strategy can be done either with your consolidation loan, or as part of your regular repayment plan.
Don’t neglect to pay your home loan off as well. We don’t often think of our home mortgage as being ‘bad’ debt, but in reality unlike investment property, our home loan doesn’t give us any financial benefits.
There are other things you can do to pay your home loan off as well, however they require a bit more explanation than I can give here. To find what I’m talking about, come along to our next FREE Property Investor Night. These events are led by experienced property mentors who have built up their own multi-million dollar portfolios, and they would love to show you how to do the same.
Click here for more details.
Pay your home loan off quickly
As mortgage interest gets calculated daily you’ll end up paying less overall if you switch up your payments so that you’re paying more often (e.g. weekly or every fortnight).
Make extra payments towards the principal to reduce the interest you pay, subsequently reducing the number of your loan repayments.
Deposit your extra payments in the redraw or offset facility tied to your home loan. The balance in your account will offset your loan balance so that you end up paying less in interest.
Have your salary put straight into your offset account and live on credit interest free for the month. When the credit card is due simply pull money out of your offset account to pay the bill.
How does this help?
Throughout the month, while you’re using credit to pay your bills, food, etc., your pay is reducing the interest charged against your home easy, no pain way to pay your home off more quickly - and save money as well.
Switch to interest only
You can save a great deal of money if you do this right.
Here’s how:
Let’s assume your mortgage payment is $2,000 monthly. Have your lender set up your repayments so that $1,700 of your payment is applied to the interest on your loan. Toss the remaining $300 into the offset or redraw that’s attached to your home loan.
That $300 will not only earn interest, it will knock down the amount of interest you pay because it offsets your loan balance.
For example, let’s say you’ve got a home loan balance of $250,000. Your offset account balance is $50,000. This means you’re only paying interest on $200,000.
Ignore rate drops
If you have a variable rate loan and your payment drops because the rates have dropped, keep paying the amount you’ve always been paying.
After all, every little bit can help.
To learn how you can use property investing to pay off your debt even faster register to attend our next Property Investor Night. We’ll show you how you can pay off your home loan and get out of debt faster than you might have imagined.
Seats fill up fast for these FREE events, so book yours now!
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!

Read more expert advice articles by Sam
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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