5 ways to downsize your debt
It’s said that only death and taxes are certainties in life, but in the modern world, some form of debt is almost guaranteed too. Here are five ways to downsize your debt and get more control over your finances.
1. Look at your money holistically
It’s all too easy to look at our money in different silos: this is what we owe, this is what we have, and this is what we expect to come in.
But you have to consider all your money as a single pool to work out what represents the best overall value for you financially.
For example, tax deductions for extra superannuation contributions may be bigger than the low home loan interest rate you’re currently paying, meaning you could be better off by beefing up your retirement earnings than paying down the mortgage a bit faster.
2. Tackle the most expensive debts first
We often think of debt as the mortgage, but it may also be personal loans, car loans, credit cards and store cards/repayment plans. And each will have different interest rates.
You’ll downsize your debt much faster by tackling the most expensive – that is, the ones with the highest interest rates – first. That’s because debts with high interest rates will grow much quicker, and can even spiral out of control.
Depending on your circumstances, it may even be worthwhile consolidating some or all of your debts into one larger debt, particularly one with a much lower interest rate.
3. Make your mortgage work harder for you
Speaking of mortgages, these can actually be used in your favour, if you know what to do and do it wisely.
Over time, you’ll build more and more equity in your home, as property prices increase over time and as you pay down the loan. And that equity can be used to make more money than the interest it would attract by being withdrawn.
As such, look at whether your mortgage has an offset account or redraw facility that you could tap into. If not, it may be time to refinance to one that does.
Consider too whether to go for a fixed, variable rate or a combination of both on your mortgage, and which makes more sense for your current circumstances. Fixed will give you budget certainty, but variable offers more flexibility.
4. Boost your income through investments
We often focus on paying down debt without building other investments. Chances are you’ve thought to yourself at some point “When I’ve paid off my home, then I will then invest”.
But you lose precious time doing this, and time is our friend when it comes to investing – the longer your investment timeframes, the more you’re likely to earn through compound interest and higher asset values.
So, consider whether you could be doing both simultaneously – investing for the future AND paying down existing debt. You may even find the proceeds of one will help you pay down the other much faster too.
5. Get your kids to pay their way
By the time you’re in your 40s and 50s, your kids – if you have any – are likely in their late teens or 20s. And a variety of factors, including full-time study, high house prices and more recently the COVID-19 crisis, mean that many young adults are still living at home.
You may or may not be happy to still have them in your nest, but they can be a substantial drag on your finances if you let them.
When they’re earning money of their own, get them to contribute to household bills, insurances and grocery costs. They would pay more if they were out on their own anyway. If they’re not working, then they can still contribute in other ways – cleaning the house and mowing the lawns won’t cost them a cent, but will save you from having to hire a cleaner and gardener.
Either way, you’re freeing up extra cash to help pay down your debts!
Helen Baker is a licensed Australian financial adviser and author of two books: On Your Own Two Feet – Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce – Your Survive and Thrive Financial Guide. Proceeds from the books’ sales are donated to charities supporting disadvantaged women. Helen is among the 1% of financial planners who hold a master’s degree in the field. Find out more at www.onyourowntwofeet.com.au
Note this is general advice only and you should seek advice specific to your circumstances.
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