Those of you that read my weekly round up posts will know that my wife and I recently reduced our debt down to under $100,000. This has been a long term goal of ours that I am extremely proud to have now achieved. In case you aren’t aware – we got into debt just under 6 years ago when we decided to take out a mortgage of just over $315,000 to build our house. At the time it seemed like such a gigantic amount of money to have to payback, interest rates were at around 8% and climbing, and I was only earning about $45,000 a year.
Before deciding to leave home and buy a house, I did a few sums and knew that the maximum amount of money I could afford to borrow was going to be around $350,000, and even with my best estimates I could see the amount of money we ended up borrowing taking us at least 20 years to pay back in its entirety.
I can still remember the first few mortgage repayments that I made, I distinctly remember feeling as proud as punch that I was doing the grown up thing and had bought a house in my early twenties. I also was pretty happy that I was making all my repayments on time. Unfortunately it didn’t take long for me to start getting a little bit distressed that the debt wasn’t going down as fast as I had hoped. You see each month this pesky thing called interest would keep adding onto my mortgage and it would erase most of the gains I had been putting in.
The following is an image of my first 3 months of repayments into the variable portion of our loan.
As you can see, every time I put a big chunk of money in, the interest would erase most of it. It was at this point in time that I decided to get smart about money and so I started learning a little bit more about how I could pay off this debt faster and stop having so much interest accruing each month.
Mortgage Repayment Frequency
The first thing I did was to start making more frequent repayments. Instead of making my repayments monthly, I started making them weekly. This meant that I could get an extra 1 month of repayments in each calendar year.
Please see the image below taken from the book The A-Z Of Saving Money to see how much time you can gain on your mortgage, simply by changing your repayment frequency from monthly to weekly.
Lump Sum Payments
The company where my wife and I both work have a performance incentive program that has lump sum bonus payments. Despite the incentive program being dubiously managed, most employees normally end up with a lump sum payment to the tune of a couple of thousand dollars. Seeing as my wife and I both get this payment we can normally expect anywhere between $2,000 and $4,000 each, which can add up to between $4,000 – $8,000 together.
Prior to getting a mortgage I would normally enjoy a bit more frivolous spending than normal at the bonus payment time of year, however, once we had a mortgage we decided that we would take 90% of the bonus and put in into the loan as a lump sum payment, with the remaining 10% split between us to enjoy ourselves.
You can see in the image below each lump sum payment that we made (Note the red arrows).
I know that for many people the GFC was a terrible thing, but for me personally it was a god send. You see the GFC brought interest rates down from >9% to around 3-4% (in Australia). As you can imagine, I went from having around $2,100 a month in interest repayments down to about $1,200. That meant that I was able to put $900 to $1,000 extra into our mortgage every month. This was a most welcome change as it gave me just that little bit more breathing room and allowed us to get on top of our debt earlier into the mortgage.
Other Debt Reduction Tips
Obviously we did more things to reduce our debt than just changing the frequency of our repayments, making lump sum repayments and having the GPC hit. But if I went into detail on every single one of them, this post would never get released. So I will simply add the other things that we did in dot point form below and link to any other articles I have written on the topics.
Image Credit: taxfix.co.uk
- Set yourself SMART goals. For me this is probably one of the most important things you can do. I did a giant post on SMART goals which you should checkout if you haven’t see it already. Achieving goals is a great way to stay motivated and ensure you are staying on track.
- Create a budget – and stick to it!
- Track your spending. Yes, even the little things.
- Limit unnecessary purchases. Those little things that you are now tracking really add up over time.
- Work with your partner to tackle your debt. It will save you a lot of pain in the long run.
- If you are struggling with debt and feel like you are sinking – get help to manage your debt!
- Understand exactly what you are getting yourself in for when taking on debt.
- Visualise your debt. Seeing where you came from and where you are now can be a really powerful way of staying motivated.
- If you have lots of different debts then it might be worth checking out debt consolidation to combine them all into a loan with a smaller interest rate.
Do you have any debt that you are working to be rid of? Do you have any great tips for others looking to reduce their debt?