Accelerated Debt Reduction Technique
When should you not pay money into your Mortgage?
Well, of course if you have a mortgage you should meet your minimum commitments at all time. But paying down the biggest debt of your life doesn’t necessarily mean that any spare cash you have should go onto the mortgage, especially if you have other debts.
The typical scenario is that a young couple meet, buy their first cars with finance, have a credit card to cover ‘incidentals’, buy a house and move in together, start planning a wedding, increase the credit card to cover additional expenses, buy some furniture on interest free or a credit card … and then come the babies. Before you know it your dual income no kids carefree lifestyle is a distant memory and you’re on one income wondering how you’re going to make ends meet.
There are two schools of thought in paying down debt …
1: Highest Interest Method: This is an old school approach … pay off the debts with the highest interest rate first. This is completely logical! It will save you money.
2: Snowball Method: I really like this concept, it addresses smaller debts first. The goal to pay off the smaller debt is far more achievable in a short time frame. Then once that debt is gone you contribute the extra funds to the next smallest debt. If you’re like me and goal orientated it is a great way to go as you have the small wins along the way.
You can see that your mortgage is NOT the highest interest debt OR the smallest, which is why it isn’t in the debt reduction line of vision.
I’ve hunted high and low on the internet for the best calculator to work this all out for you, and guess what? … There isn’t one, probably as the whole conundrum is too confusing.
I did find this calculator though Debt Reduction Methods Calculator and it does work out the interest differences over twelve months between the two methods mentioned above … and that may be helpful.
If you know someone with personal debts that are out of control this spreadsheet might just help them with their plan of attack, if not you could point them to this page https://www.moneysmart.gov.au/managing-your-money/managing-debts/financial-counselling . Personally I would avoid that company that advertises on TV, the one with the lady and the annoying voice (no names mentioned here). They just take everything out of your hands but don’t empower you to deal with debt, a financial counsellor will be empowering.