Most of us have debt, but a lot of us struggle to understand how to manage it. Did you know that 400,000 Kiwis ended last year behind on their debt repayments?
What does that actually mean? Because of the increasing cost of living, Kiwis are unable to have access to more cash, which means their budget starts to get tight and restricts their ability to pay back the debt.
Debt can come in the form of a credit card, a mortgage, personal loans, or car loans, just to name a few.
It’s much easier and quicker to get into debt than to get out of it.
There’s often bad debt and good debt; bad debt is debt we use to fund things that don’t produce us income and is purely an expense. Good debt is known to be debt used to acquire an asset that generates income and increases in value over time.
In this week's blog, we’ll walk through all the different ways to pay off debt quicker and get the banker off your back.
Let's get into it.
1. Set a budget and list out your debts.
Setting a budget means you can see where your money is coming in and going out. By understanding the ins and outs of your income and expenses, you can see where your essential expenses are and what's left over.
Once you’ve locked in a budget, list out all of the different types of debt you have, including the name, interest rate, and amount. This helps you see everything on one page to get a simple view of where you stand.
The idea is that after seeing what's left over, you use that to domino your debts and pay them off as quickly as possible using things like the snowball or avalanche method.
It’s important to keep track of your budget per week to see where you may be overspending or where you could be saving more to pay down your debt quicker.
2. Make extra repayments on debt.
Making extra repayments can knock years off of your loan and bring you closer to living a debt-free life.
Using an example of a $300,000 mortgage on a house that has a 30-year term, if the interest rate on that mortgage was 5.99%, then the fortnightly repayments would be $829. If you increase your repayments by $100 a fortnight, you could knock 8 years off of your mortgage. Easy peasy!
If your interest rate is low, prioritise paying that down the most while your repayments are low. You’ll thank your future self if you make a sacrifice now to pay off more debt. That way, you knock years off of your loan, and if rates increase, you’re prepared and can front-foot an increase in repayments.
If your budget allows you to, prioritise paying off more debt before anything else.
3. Snowball method
The snowball method is a great way to pay off debt quicker while also continuing to make the minimum repayments on other debts. The idea behind the snowball method is that you build momentum as you pay off each of your debts; it's like a snowball rolling down a hill. It gathers more momentum as it rolls.
- List your debts: Start by listing all your debts, including credit cards, loans, and other outstanding balances. Include the outstanding balance, interest rate, and minimum monthly payment for each debt.
- Order your debts: Arrange your debts in order based on the outstanding balance, with the smallest debt at the top of the list.
- Pay minimums and focus on the smallest debt: Make minimum payments on all your debts except the smallest one. Allocate any extra funds you have towards paying off the smallest debt as quickly as possible.
- Celebrate small victories: As you pay off the smallest debt, celebrate your achievement without going back into debt. Use the momentum and the money you were putting towards the paid-off debt to tackle the next smallest debt on your list.
- Repeat the process: Continue the process, rolling the payments from the paid-off debts into the next one. Over time, you'll have more funds available to pay off larger and larger debts.
4. The avalanche method
The avalanche method is where you pay off the debt with the highest interest rate first. The idea is that once you pay off that debt, it should become easier and easier to pay off the rest, which will have smaller interest rates.
- List your debts: Start by listing all your debts, including credit cards, loans, and other outstanding balances. Include the outstanding balance, interest rate, and minimum monthly payment for each debt.
- Order your debts: Arrange your debts in order based on the interest rate, with the highest interest rate at the top of the list.
- Pay the minimums and focus on the highest-interest debt. Make minimum payments on all your debts except the one with the highest interest rate. Allocate any extra funds you have towards paying off the debt with the highest interest rate as quickly as possible.
- Move down the list: Once you pay off the debt with the highest interest rate, take the money you were putting towards that debt and apply it to the next debt on the list with the next highest interest rate. Repeat this process until all your debts are paid off.
5. Preparing for increasing interest rates
It’s no joke that Kiwis are feeling the pinch at the moment, and on top of that, most of us are starting to roll onto new interest rates for our homes. Instead of interest rates starting at 2%, we’re starting to fix our home loans at around 6-7%.
These increases make people feel nervous about where they’re going to find the extra money to pay the increased repayments. Here are some tips and tricks below to make sure you don’t get any surprises when it comes to re-fixing time:
- Plan ahead and stress-test your budget for what might happen in the future. Adjust your budget to see if you can afford the increased repayment amount; if you find you can’t afford it, see if you can make any changes to other existing expenses that are more of a ‘want’ than a ‘need’. Now start putting that extra repayment amount into an account and see if you can survive, try to do this before you go to reset to see how you're impacted ahead of time.
- Don’t extend your loan term to reduce your repayments. I know it's tempting, but if your repayments are increasing and you have 20 years left on your loan, why not push it out to 30 years to make the repayments lower? Wrong. Although in the short term your repayments might be lower than they would have been if you kept it at 20 years, you’ll end up paying more interest in the long run and be locked into the loan for longer.
- Pay extra on your mortgage now while you’re still on a low rate. While you still have a low interest rate if you’ve locked it in for a few years, prioritise paying that debt down as quickly as possible. Depending on your financial plan, sacrifice other expenses to allocate funds to the loan.
- Speak to a mortgage advisor or financial advisor when you go to fix your new interest rate. Your situation is likely to be different from others. It's important that if you’re unsure about what you should do, speak to a professional, such as a mortgage or financial advisor. Advisors are often free but sometimes charge an upfront fee, but the value and peace of mind you gain from them largely outweighs the price you sometimes have to pay. You can find a mortgage broker in your area here: https://mortgages.co.nz/find-a-mortgage-broker/.
There you have it, 5 simple ways to manage your debt better and get the banker off your back!
Have you registered for when we launch?
Register for when we launch to get early access and special deals and easily get more clarity on your finances. Sign up here.
Final words
Thanks for reading, if you have any feedback or questions on what you've seen so far, feel free to get in touch using our contact form or alternatively give us a bell at hello@budgetbuddie.co.nz
Disclaimer
This blog or any other information provided by BudgetBuddie is not financial advice. If you're needing financial advice please get in touch with a licensed financial advisor or professional.
