How to pay off your debts ASAP

It's common knowledge that debt and financial problems are the number one cause for stress and worry in our lives. 

Recently I met with "Frank and Ernest" who had amassed combined total debts of $127,000 across their credit cards, home loan and personal loans. 

Frank told me that they expected to be debt free in fifteen years (based on his mortgage etc). 

"How does being debt free within the next five years sound?' I asked.

A Frank and Ernest Conversation.

Frank: “You can't be debt free in 5 years or less if you own a home”. 

Me: “Really, do you mind if I use you as an example?”

Frank: “This will be interesting”

Me: “Can you save 10% of your gross income?”

Frank: “If it means I will be debt free in 5 years absolutely.

The following table shows the Frank and Ernest's financial income and expenses position

Clients	Gross	Tax Approx	Net	Spend
Frank Income	$55,000	$10,000	$45,000	$2,400 (Fixed)
Ernest Income	$35,000	$4,000	$31,000	$2,000 (cash)
				$1,900 Other exp
Total	$90,000	$14,000	$76,000
Per Month	$7,500		$6,300	$6,300

Frank and Ernest agree to save 10% of their gross income per month = $750 and they find this by making savings within on their current expenses etc…

Summary of Debts Held by the Client

Item Description	Major Debt	Monthly Repayments	Interest Rate	(Factor)	Payment Ranking
House	$100,000	$1,100	10.5%	90	5th
Car	$20,000	$450	15%	44	4th
Myer/Store Card	$2,000	$350	21%	5.7	2nd
Credit Card	$1,300	$300	19%	4.3	1st
Personal Loan	$4,500	$200	23%	22.5	3rd
Total	$127,800

The following is the sequence we recommended the client pay down their individual loans so to achieve the goal of being debt free in less than 5 years.

As with many things in life the simple the strategy, the easier it is to implement and the more profound its impact.

So while people get concerned and confused about the best way to pay down debts, the following is what I believe to be one of the simplest and best formula to make it a reality for you.

Starting with the debt with the least owing, pay this off and then with the interest you are now saving (by paying off the debt) add this towards paying off your next debt etc… lather, rinse, repeat until all your debts are paid off.

Debt Reduction Recommendation

Item Description	Repayment Progression	Debt Clearance	Time line
1st Credit card	Outstanding balance $1,300 repaid at $1,050pm= $300 (repayment rate) + $750 savings	1.5 Months	Month 1.5
2nd Store Card	Outstanding balance $2,200 repaid at $1,400pm =$1,050 from available savings i.e. $750 per month + $300 repayment saved as 1st Credit card paid out+ $350 (repayment rate) on store card.	1.5 Months	Month 3
3rd Personal Loan	Outstanding balance is $4,500 repaid at $1,600pm = $1,400 from available savings i.e. $750 per month + $300pm repayment saved as 1st Credit card paid out & $350pm repayment rate on the Store card + $200 personal loan monthly repayment rate.	3 Months	Month 6
4th Car Loan	Outstanding Balance $20,000 repaid at $2,050pm =$1,600 from available savings i.e. $750 per month + $300pm repayment saved as 1st Credit card paid out + $350pm repayment on the Store card + $200pm repayment personal loan rate + $450pm repayment car loan rate.	10 Months	Month 16
House Loan	Outstanding Balance $100,000 repaid at $3,150pm =$2,050 from available savings i.e. $750 per month + $300pm repayment saved as 1st Credit card paid out + $350pm repayment rate on the Store card + $200pm repayment personal loan  rate + $450pm repayment car loan rate+ $1,100pm repayment home loan rate.	32 Months	Month 48

Some people may argue one can also achieve the same outcome by consolidating all your loans into one big loan at a lower interest rate. While this may be so in theory, the real issue is that people become more laissez-faire, thinking they can now slack off in their repayments or go out and spend more.

The human tendency is to again go out and spend on the card or on an unforeseen expense or emergency (if they don’t have an emergency expense savings account).Due to the minimum debt repayment set by the financial institution (compared to what the individual is paying as a whole now) and simply because its available, yes you guess it… it goes on to the credit card again and ultimately the borrower ends up in more debt.

By implementing the debt reduction method of one debt at a time; one’s confidence builds through reinforcement as the evidence of progress reveals itself, (releasing debt burden) one debt at a time.

Paying off debt and never owing it again is a truly liberating experience. I encourage you to embrace this approach if you are lost and confused when it comes to how to best pay out your debts.

 About Peter Horsfield

Peter Horsfield in an Authorised Representative and Investsure Holdings Pty Ltd ABN 16 050 286 630 as trustee for Horsfield Family Trust ABN 55 609 068 513 is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523.

This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. Infocus Securities Australia Pty Ltd strongly suggests that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances.