Clearing your bad debt is essential to achieve your financial goals.
Bad debt is debt associated with expenses that don’t improve your long term financial position, unlike investment debt. Examples of ‘bad’ debt include credit cards, personal loans and car loans.
When it comes to getting into your first investment property, bad debt is twice as evil.
Not only does bad debt affect your ability to save through the ongoing repayments, but it also lowers your borrowing capacity significantly. If you are already suffering with a low borrowing capacity, clearing this ‘bad’ debt is critical!
To help you get started, we’ve detailed our top four tips on how you can pay down your debts sooner rather than later!
Tip #1: Pay More Than The Minimum:
This one goes without saying, paying more than the regular repayment will not only shorten the length of your term but also save on the amount of interest you pay over the term.
This is a helpful tip as well when it comes to mortgages. Before you start attacking this debt, it’s essential to review the terms of your contract. A lot of companies charge penalties for extra repayments. Remember, they want to keep you in debt!
Tip #2: Pay More Than Once A Month:
Similar to the above, this tip provides an easy method to half your loan without thinking. Simply increase the frequency of your repayments and watch your debt decrease!
Tip #3: Use the ‘Snowball’ Framework for Multiple Debts:
This method refers to a strategy of tackling multiple debts as it’s all about allocating the funds in the most efficient way possible.
Rather than allocating your funds to all debts, take the approach of allocating all of your funds to one debt and once you’ve paid it off, roll that same balance towards that next debt.
The only question is, which debt to prioritise first? Some prefer to start with the smallest debt to get rid of it and feel a sense of accomplishment fast, while others target the largest debt as it’s likely the one costing them the most money.
This same technique is often applied to property investment. When discussing structures with clients, they commonly don’t have all mortgages on principle and interest arrangements. Instead they either have one investment property or their home on a principle and interest arrangement to prioritise paying down that debt. The other loans are interest-only, which allows them to use their cash flows to help pay down the one debt. If you own your own home, it’s important to focus on this debt as there is no income being derived from it – your investment properties however, can be self-serviced from rental income.
Tip #4 Debt Consolidation:
This technique can assist paying down debts by moving multiple high interest loans to a new loan at a lower interest rate. For clients with existing home loans, refinancing bad debt into that loan can often be beneficial due to home loans having lower interest rates.
For more information on how you can pay down your debt faster and get into your first investment property sooner, simply fill out the form below!