Wealth Creation

Introduction

In the last blog post we talked about creating a budget and working out whether or not that you are living within your means.

With this post I was struggling whether to write on Savings Plans or Debt Reduction first as they are both equally important.  I find that it’s generally better to try and remove debt as quickly as possible as you tend to pay a higher interest on debt than interest you receive on savings.  On saying that, you still will have to save a little bit for a rainy day but all of your focus should be on eliminating debt.

So, what is debt?

Debt is basically a condition that arises where you owe money or are under obligation to pay money for a good or service. This comes in many forms but the most common are that of loans, credit cards and bills. The problem with loans and credit cards is that these types of borrowings inherently have high rates of interest attached to them, so paying them off becomes even harder, especially if you only pay off the minimum monthly repayments.

Debt can be split into:

• Good Debt: which is borrowed money for an investment that will appreciate in value or can generate a higher amount of interest than that of the loan. For example, property, stocks and shares, business, art, wine and precious metals (jewellery), etc.

• Bad Debt: which is to borrow money for items that will depreciate in value. For example, a car, holiday, entertainment equipment and other material items of that nature.

In today’s society you’ll find that it’s easier than ever to get yourself into debt. With the media encouraging and conditioning people to spend money through their flashy advertising. Not only are people spending their own money but they borrow as well, with the banks willing to lend to almost anyone. They make it a business to entice people to live outside of their means.

How do you eliminate debt?

For Debt Reduction you need to focus on your mindset more than the strategies as the strategies are easy but to stay on track with your budget each month and focus all of your disposable income into reducing your debt takes dedication and commitment.

Here are some simple Debt Reduction Strategies that I have used:

• Create a debt list: This can be done in two ways, first use your budget to get a list of all of your debts and list them with the debt that has the highest payable interest and work your way down the list. Second, you can arrange the same list from the smallest amount owing to the highest.

• Debt reduction strategy: Using the list you have just created, start with the top item and concentrate all of your dispossible income on paying this off as quickly as possible, for example a credit card debt of $2000.00 @ 15% interest, that had a minimum monthly payment of $200.00. Instead of paying the minimum add the dispposible income of $300.00 to the minimum payment. On doing this you’ll find that instead of taking 11 months to pay off it’ll only take you 5 months to pay it off.  Once this debt has been payed off, use this alloted money of $500.00 to add to the payment of debt on the next item on your list, say a car loan of 25,000.00 with a minimum payment $415.00 p/m @ 10% interest. So now you’ll be paying $915.00 p/m and you’ll have the debt cleared in 2 yaers and 8 months. Once the car loan debt has been payed off continue to the next debt on the list and add the extra $915.00 to that debts monthly payments. Work your way down the list and you’ll be out of debt in no time. Remember that this strategy relies heavily on your ability to have a surplus budget. If you don’t you might be able to use these strategies below to free up some money.

• Consolidate loans: This is usually a commercial service that will combine all of your smaller higher interest debts like credit cards and small loans etc, into a large single more manageable loan that usually has a fairly low interest rate. Do this to generate a monthly surplus in disposable income so that you can target the first debt that you want to get rid of. You’ll also find alot of educational resourses on sites like Fox Symes Debt Solutions.

• Credit cards: Shop around, there are plenty of banks and credit unions that now offer 0-3% interest on any transferred balances. Find one to reduce large monthly interest repayments. These low interest cards typically have a 6-12 month expiry. When they are due for expiry simply find another low interest card and transferr the balance again. Here are two that I know about. ANZ credit card and Citibank credit card.

• Home loan: There are so many different types of home loans and strategies that can be used to help either reduce your monthly payments or cut years off the life of your mortgage. It’s probably best to find a broker like Aussie Homeloans or Mortgage Choice to help you with this as they are experts at tailoring a loan to meet your individual needs.

These are just a few of the more simple strategies that are out there. I hope that these Debt Reduction strategies will be of some benefit to you, as debt is an easy hole to fall into and a hard one to get out of.

If you have come across any good debt reduction strategies or ideas, please feel free to comment about them in the comment section below.

In my next post we will discuss Savings Plans. I hope to see you then.

All the best in your wealth creation journey,

Jon Symonds.