How to reduce your debt quickly

Disclaimer – everything in this post is based upon my own research. As with all information online, you should always double check information and research things from sources you trust. Asking advisors is also a plus. 

PS: I’m not trying to sell you anything in this article. And I don’t want your email address either. I’m simply sharing information I consider extremely useful. 

Your bank is controlling your life

It’s no secret. Banks run the world. Why? Because they control the money. And money control your life from the moment you are born to the moment you die. I’m not saying it’s a bad thing. I’m just saying that’s how life is.

You might say you don’t care about money. But do you get all the food you eat for free? Do you get to live in a house or an apartment for free? If you actually do, does anybody else have to pay for this? The fact is, money is important. It’s not the most important thing in life. But by ignoring your finances you might decrease your life quality in ways you are not currently aware of. In this article my goal is to show you how you migth turn this around in your favour. Without ever having to open a single boring book on finances or accounting.

Pay down your loans quickly and create more economic freedom in your life

Most people have a mortgage to pay. They also might have a student loan. A car loan. A credit card loan. Parts of these loans are necessities of life. But the big problem with loans is that you have to pay interest on it. A lot of interest. The trick to becoming your own bank is to pay as little interest as possible. And no, I’m not talking about choosing the bank with the lowest interest rate (even though that might also be a wise choice).

How? It’s common sense really, and very simple. But it’s not necessarily easy. As with everything else in life, there is no gain without pain. The challenge with this method is that you have to take the pain first (making sacrifices), before you can enjoy the gain later (more economical freedom). Taking up new loans is easy. Why? Because you can take the gain now (more money) and worry about the pain later (huge monthly payments). That’s exactly why the banks control your life. Because they offer an easy way out now that keeps you trapped in an interest paying labyrinth for possibly the rest of your life. But you can break out of this cycle. Below are two simple, effective methods.

Man staring at an overview of his financial position on an iPad.

Debt reduction method #1

This is an overview of Lisa’s loans:

Lisa’s loans
Home loan
Car loan
Credit card
Student loan
Amount
$100,000
$10,000
$6,350
$30,000
Monthly payment
$1,000
$750
$250
$200
Factor
100
14
26
150

Now Lisa loves cafes. But she has decided to only go to cafes in the weekends. In addition, she’s also decided to cut back on shopping. This enables her to use an additional $300 each month to spend on reducing her loans faster. Now which loan do you think she should spend this extra $300 on?

The correct answer is the car loan because this has the lowest factor. The factor is the amount of montly payments it will take to pay down each loan completely. If Lisa can add an extra $300 to her car loan, her monthly payment would increase to $1,050 ($750 + $300 extra). She’ll be able to pay down her car loan faster, and her factor now goes down to 10 ($10,000 / $1,050). In other words, she’ll be able to pay down her car loan in just 10 months instead of 14.

Now what? Well, since Lisa is seeing the benefits of taking the pain now and getting the gain later, she decides to continue with this plan. The $1,050 she used to pay on the car loan, she now adds to the montly payments for the next loan with the lowest factor – the credit card loan with a factor of 26. She currently pays $250 on this, but with an additional $1,050 she can now pay $1,300. Her factor now goes down to 5. Instead of spending 26 months on repaying her credit card debt, she can now do the same thing in only 5 months. All she does is sacrificing an extra $300 a month and using this method.

You get the idea. After paying down her credit card loan she would move on the mortgage (factor of 100) and add the money she spent on her credit card to her mortgage payment instead. I would encourage you to create a simple list like this for your own loans and find your factors and montly payments. It’s not rocket science. But it will reduce the amount of time you’ll have to use paying down your loans.

Two people looking at their finances.

Debt reduction method #2

By pre-paying your mortgage principal you can cut the time spent on paying your mortgage in half. For this to work you’ll need to have a mortgage that has a floating interest rate (you’ll be penalized for paying mortgages with fixed interest rates faster than intended), and you’ll also have to ask your lender for your amortisation schedule. Below you can see Lisa’s amortisation schedule:

Month
January
February
March
Payment
$1,000
$1,000
$1,000
Balance
$98,172.85
$98,132.45
$98,091.47
Interest
$960
$959.61
$959.21
Principal
$40.00
$40.39
$40.79

When Lisa makes the January payment, she’ll also pay the principal part for February ($40.39). Now Lisa won’t have to pay interest on the $40.39 when she’s paying in February. When Februay arrives, she’ll pay the usual $1,000 + $40.79 (next month’s principal). Doing this will greatly decrease the time spent on paying down your mortgage plus you’ll spend way less on interest.

For most mortgages the monthly payment is constant, but the more you pay down on the mortgage the more your payment will consist of principal (vs interest). Since the principal part is increasing over time, you might end up not being able to pay the whole principal for next month (in the excample above the principal will gradually increase to $1,000). That’s OK. Pay as much as you can from that point on, and it will still help.

These steps are quite simple, but still hugely effective. It only takes a little effort, and you’ll be well on your way to reducing your debt supermode style 🙂

I learned about these techniques in a book by Jamie McIntyre called What I didn’t learn at school but wish I had. If you want to buy an audio edition, here’s a link for that.

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