How to pay off debt faster
Australians have the highest debt in the world. Collectively, we carry over $1 trillion in debt or around $73,000 per Australian adult. Most of our debt is mortgages, followed by loans and credit cards. 70.19% of adult Australians have a credit card. Debt is crippling, it means you pay more for things that you should have and stops you from being able to take up many other opportunities.
Just because debt is ‘normal’, doesn’t mean you need it! Write down all the debt you have, how much it is, what it is for, what the interest rate is, any account fees, early termination fees and how long until it is paid off.
Knowing the details of your debt enables you to create a proper plan to pay it off.
Financially, it is best to pay off the debt with the highest interest rate first while continuing to pay the minimum on other debts until this one is gone. Once this debt is gone put all the money you were putting on that debt onto the next debt. This is called snowballing.
However, psychologically, it is typically easier to pay off the smallest debt first, working your way up from smallest debt to biggest debt with the snowballing method. The reason is that you feel like you are achieving something with each debt paid off and the small debts are paid off faster, thus boost in confidence and desire to pay off the debt.
What can you do to pay debts off quicker?
1.) Compare debt providers
Banks, credit unions and loan providers (or debt enablers!) offer different options. Check interest rates, annual fees and look for 0% balance transfer options where possible so you can save interest and pay off your debt.
For other loans, you can compare banks, their interest rates, fees and charges to see if it is worth switching. If another bank is offering a better deal you can always try and negotiate with your current bank to match it.
Now, do not actually apply for anything until you find the right one. Each application goes on your credit report which impacts your credit score. The lower your credit score, the higher your interest rates and the harder it is to get a loan or credit card.
Do your research without applying, then applying when the deal is right.
2.) Negotiate a better deal
If you aren’t in a position to switch providers, negotiate with your current one. If you have a few things with the one bank or have been with them a long time ask them what they can do for you. Will they reduce the interest rate? Tell them you would like all the monthly fees removed and things like that. Any money you are able to save this way is money you can pay directly off your loan. You can even play banks against each other and try to get the best deal. Remember, you don’t just have to stick to banks, there are credit unions and other financial institutions.
3.) Transfer all excess
Whenever you save money on something transfer that amounts to your debt. For example, if you budgeted $150 for groceries this week but only spent $120, transfer the $30 savings to your debt. If you have $1.36 left the day before payday, transfer it to your debt. Another thing you could do is round down. Every time I check my banking if the amount is something like 106.73 I transfer the $6.73 (to debt if I have it, or savings if I have no debt), to round my balance down. I cleared an extra $300 off debt in a few months without noticing it by rounding down a few years ago.
4.) Save in every area possible
Go over your a budget with a fine tooth comb, try doing the 21 Day Money Challenge to help with it. Where can you cut back? Compare your insurance (I saved over $1,000 doing this), compare your phone/internet/electricity/gas/any bill you have to see if you can either get a better deal or ask for a discount. Use these 17 tips to reduce your electricity bill. If you have a pension card, are you getting all the discounts you could be?
Do you need two cars? Would it be cheaper to walk and get public transport everywhere? Are you utilising VIP and loyalty programs? Are you using all the coupons/discounts you can in Australia? Have you signed up for these Aussie freebies, gotten bonus cash or signed up for these Australian birthday freebies?
Where can you save more money? With each small amount you save, put it straight on your debt.
5.) Sell off your excess
Go over everything in your home, garage, everywhere and sell off anything you don’t love, need and use. Have a garage sale, list things on eBay, sell it on Facebook, send emails to friends and family letting them know what you are selling, use Gumtree and newspaper classifieds. Just sell what you can and put all that money towards debt.
Take photos, give accurate, clear descriptions and make sure you know what to charge for postage. Put all the money you make from selling things onto debt. Check out this eBook for more tips on selling.
6.) Look for ways to make extra money
Can you get a second job, start a side hustle or make money in any form? Check out 10 ways to make $1,000 in a month, how to make your mortgage pay for itself, 101 ways to make money from home, Australian online survey sites, how to sell your stuff or space, try Airtasker, Uber or rent a room on AirBnB.
If you are in debt, do what you need to make more money and clear it.
Bonus advice on debt
Along with clearing it, change your habits and mindset. Think about what caused you to get into debt, your relationship with money, why you spend how you spend and what you need to change. A few articles that might help are 10 tips to help you stop spending and 5 tips to deal with temptation.
One last tip, just like Dave Ramsey, I think it is a good idea to have a $1,000 mini emergency fund. It is there for real emergencies like your car needing unexpected repairs, your insurance excess etc. It will stop you using your credit card and help you break the habit of depending on one.
What are your debt reduction tips?
You might also want to check out how this couple paid off $90,000 worth off debt in a year (they started off unemployed) for inspiration too.