Now that you have all your debts clearly listed you can go to work on the best (i.e quickest) way to pay them off. So what is the best way?
The best way to pay off your debts is to first pay off the loan which has the highest interest rate, without attracting any additional fees on the any of your loans. This means:
1) pay the minimum amounts due on all your loans by the due date. If you don't do this, you'll attract late fees on loans which are very high.
2) put the rest of the money towards paying off the loan which has the highest interest rate as long as you are not penalised for doing so. If you have fixed payments you make to a loan and are not allowed to pay extra without paying a fee, then use the money to pay off the loan with the next highest interest rate.
3) when you have paid off a loan, you can move on to the next one. Repeat this until all your debts are gone :)
This is a lot easier said than done. But following these steps are important and will make sure you pay off your debts as quickly as you can. Here are some tips that may be useful to following the steps:
1) when you get the bills for your loans, mark on a calendar (or on the table, or on something you will look at frequently) the due date for the payment and the amount. Make sure you pay it before or on this date! If you can't meet these payments, you may be in trouble and will need more help than I can provide on a blog. Talk to your personal banker or to a budgeting service.
2) The main types of loans you may have are:
-finance company loans
-hire purchases
-credit cards
-personal loans from banks
-home loans
-loans from the government (eg student loans)
This list has the typically highest interest rate loans on the top, and the lowest on the bottom. Of course this may not be the case depending on what you were offered but it is a good place to start.
3) Congratulations! You have one less debt to worry about. Now don't go using that source again. If you paid off a credit card, cut it up! If it was from a finance company, never go there again! You will be able to pay off the next loan quicker since you will not be putting any of your money towards that loan.
So using the table in the previous post as an example, I would pay the minimum amounts due on each of the credit cards and personal loan. The minimum student loan payment comes straight out of your pay so that is not of a concern. If there was extra money to go towards paying off the debts, I would put it towards credit card #1 first. Once that is paid off, I would concentrate on credit card #2. Then I would pay off the personal loan, then the overdraft, and finally the student loan.
If you have many different debts to repay, there is another option which may make managing your debt a lot simpler. The next post will discuss this.
Wednesday, January 6, 2010
Friday, January 1, 2010
What is the main obstacle in your way to achieving financial freedom?
Debt is something that a lot of people rake up very quickly. Having debt is a major obstacle to achieving financial freedom because of the interest you pay. Interest is added to your debt and this must be paid before you can pay off any of your loan. The payments eat away at your income which means you have no or little money left to save.
The less you earn, the more likely you are to be in debt, and the harder it will be to get out of it. Sometimes you may have no choice but to get a loan to fund necessities (eg car/education). Sometimes you may have used your credit card to buy things you've wanted but don't really need. This is all in the past now and instead of looking back and regretting purchases, you should focus on how to get out of debt.
How should you start?
First of all you should make a list of all your debts. Write down the type of debt, the amount you owe, the interest rate, the amount of fees you pay, and how often you need to make payments. Include all debts (this means your student loan and mortgage). This is what it could look like:
This is a good exercise to do because it highlights how much you owe altogether. This can be shocking enough to make you want to change your ways. It also shows that repayments, fees, and interest rates can vary a lot depending on the type of loan. It also means the amounts you'll need to pay will vary too.
In my next post I will continue by giving some ideas on how to eliminate all the debts you've listed.
The less you earn, the more likely you are to be in debt, and the harder it will be to get out of it. Sometimes you may have no choice but to get a loan to fund necessities (eg car/education). Sometimes you may have used your credit card to buy things you've wanted but don't really need. This is all in the past now and instead of looking back and regretting purchases, you should focus on how to get out of debt.
How should you start?
First of all you should make a list of all your debts. Write down the type of debt, the amount you owe, the interest rate, the amount of fees you pay, and how often you need to make payments. Include all debts (this means your student loan and mortgage). This is what it could look like:
| Type | Amount Owed | Interest Rate (p.a.) | Fees | Frequency of Repayments |
| Overdraft | $1000 | 0% | $2 per month | - |
| Credit Card #1 | $1600 | 19.95% | $35 per year | Monthly |
| Credit Card #2 | $1300 | 6% | $24 per year | Monthly |
| Personal Loan | $1800 | 5.75% | - | Fortnightly |
| Student Loan | $29,000 | 0% | - | Fortnightly |
This is a good exercise to do because it highlights how much you owe altogether. This can be shocking enough to make you want to change your ways. It also shows that repayments, fees, and interest rates can vary a lot depending on the type of loan. It also means the amounts you'll need to pay will vary too.
In my next post I will continue by giving some ideas on how to eliminate all the debts you've listed.
Thursday, December 31, 2009
Happy New Year
Robert Kiyosaki is an author who you may have heard of, or read his books. His views on the path to financial freedom are controversial, and most people have strong opinions on whether they are good ideas or not.
One concept he brings up in his books is the "Cashflow Quadrant." This is a square with Employees and the Self-Employed on the left side (E&S), and with Business Owners and Investors on the right side (B&I). The key to financial freedom according to Kiyosaki is to be on the right side of the Cashflow Quadrant. This is the side where money works for you. On the left side, you are working for money, and it will be very hard to gain financial freedom in this way.
The problem with this is that most of us are on the left side, and moving to the right side is not easy. To move to the "B" quadrant, you need money to buy an existing business or start a new one. If you purchase an existing business or a franchise, the more successful it has been, the more expensive it will be to purchase. If you are starting a business from scratch, you may not need as much money, but it is less likely to be successful. 9/10 of new businesses fail within the first year, and of those that make it past the first year, 9/10 of those will fail within the next four years. Of course, if you create the one business out of 100 that is successful, you will be very rich. But the odds are against you.
The other option is to be an investor. This also requires money. I believe this option is a better choice for myself personally. So for the next few weeks I will post entries on how to get into a position where you can get to the right side of the Cashflow Quadrant and be an investor. Next week I will talk about getting out of debt.
One concept he brings up in his books is the "Cashflow Quadrant." This is a square with Employees and the Self-Employed on the left side (E&S), and with Business Owners and Investors on the right side (B&I). The key to financial freedom according to Kiyosaki is to be on the right side of the Cashflow Quadrant. This is the side where money works for you. On the left side, you are working for money, and it will be very hard to gain financial freedom in this way.
The problem with this is that most of us are on the left side, and moving to the right side is not easy. To move to the "B" quadrant, you need money to buy an existing business or start a new one. If you purchase an existing business or a franchise, the more successful it has been, the more expensive it will be to purchase. If you are starting a business from scratch, you may not need as much money, but it is less likely to be successful. 9/10 of new businesses fail within the first year, and of those that make it past the first year, 9/10 of those will fail within the next four years. Of course, if you create the one business out of 100 that is successful, you will be very rich. But the odds are against you.
The other option is to be an investor. This also requires money. I believe this option is a better choice for myself personally. So for the next few weeks I will post entries on how to get into a position where you can get to the right side of the Cashflow Quadrant and be an investor. Next week I will talk about getting out of debt.
Tuesday, August 4, 2009
Welcome
Hi, and welcome to my blog. This blog is aimed at making the you more aware of the financial choices available, and to help you make more informed decisions.
It's aimed at New Zealanders, but others should be able to use the information in the blog to help achieve their goals.
Right now this is a 'work in progress,' but I will change the look of the blog in the future. For the meantime, I will be posting an entry every Saturday. I hope you find it fun and informative. Please feel free to comment or email me your feedback. Thanks.
It's aimed at New Zealanders, but others should be able to use the information in the blog to help achieve their goals.
Right now this is a 'work in progress,' but I will change the look of the blog in the future. For the meantime, I will be posting an entry every Saturday. I hope you find it fun and informative. Please feel free to comment or email me your feedback. Thanks.
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