How to avoid the “scatter gun” debt trap
August 25th, 2013 by admin
Thousands of Australians find themselves over their head with too much debt at sometime in their life. You may know the feeling or know people in your life spending a lot of their time dreading opening the mail and avoiding blocked and unknown phone numbers. You may have experienced paying off bits and pieces of different debts in an effort to keep your head above water. Debt can create a lot of stress and overwhelm.
Well there is a way to put a plan together to help take back control and give you the confidence that you can get on top of debt – and even use it to your advantage.
Exercise: List your current debts into Good / Bad / Ugly categories. See definitions and some examples in the table below.
|Definition; Loans with interest that is tax deductible or paid pre tax
Investment property loan
|Definition; Loans that are not tax deductible but they are secured by something of use or value
Home mortgage (primary place of residence)
|Definition; Loans that have high interest, are not deductible and generally do not have anything to show for it
If you have ugly loans, this is the best place to first pay your attention. Here’s the steps.
Reduce the repayments in the Good and Bad columns to the minimum or interest only,
Approach your existing bank to see if they will consolidate all these into a lower rate facility. If your existing provider is not able to help you then there are plenty of online comparison sites that may help you find a provider or bank that will help you consolidate (make sure you read the fine print!),
If you cannot consolidate these loans then order them from the highest interest rate to the lowest,
Now reduce all of these to minimum repayments and pour all the extra repayments you now saved by reducing all the other repayments into the highest interest ugly debt,
Once the debt with the highest interest rate is paid off, pour all extra repayments to the next highest interest rate and so on until all the ugly debts are repaid.
Repeat this process for the bad debt, starting with the loan with the highest interest rate.
There is no magic financial trick to this strategy, it is pure mathematics and all just reducing the interest that you are paying by getting rid of the highest interest ones first therefore reducing the amount of wasted bank interest you pay in the quickest and most effective way.
Having a plan that keeps you focused will help you stay on track and reduce the stress and overwhelm that having no debt repayment strategy can cause.
For a clear demonstration WATCH THE ‘GOODBYE BAD DEBT’ VIDEO
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