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.
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