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Managing Debt

Managing Debt

Money. We all need it, wish for it and occasionally mismanage it. Most parents and grandparents agree they would like to see financial skills taught from an early age, both at home and in the classroom.

Hardly a week goes by without hearing another hard-luck story from someone who has ended up in a financial mud pool because they didn’t follow some basic rules about money. Anne from Auckland is determined not to end up in that mud pool and has asked for some tips about reducing debt.

Ways to Reduce Debt

The general principle is to repay as much as you can as often as you can. Even small increases in mortgage repayments will add up to savings of many thousands of dollars in interest in the long run.

Here are some other tips:

  • Use windfall gains to make lump sum repayments (e.g. an inheritance, the sale of a second vehicle, an unused boat or caravan, etc).
  • Hold an annual garage sale. Use the proceeds for a lump sum mortgage repayment.
  • Have a coin tin. “If you’re collecting coins at a rate of $20 a month, use this to increase your repayments.
  • Take in a flatmate or boarder if you have a spare room, or rent out a garage or yard area to those looking to park a car, boat, or caravan.
  • Take on a part-time job with all of the income going into mortgage repayment.
  • If you have credit card debt, switch the balance to another credit card company offering 12 months interest free on a balance transfer. Use this extra time to clear the debt.
  • Cut living costs by growing your own fruit and veges, and review all of your living costs to see the areas where savings can be made. Most families can cut 15% off their annual spending without even noticing. The most obvious areas are cutting down on the vices – like smoking, booze, partying, fast and furious cars (!!), and takeaways.

If you are locked into a fixed rate loan that you would like to repay but don’t want to pay break fees (early repayment fees), all is not lost. Most banks allow part repayment of a loan without penalty. John had two fixed rate mortgages that had some time to go before coming off the fixed rate. Repaying the loan early would have cost many thousands of dollars in early repayment fees, but the bank allowed him to increase his monthly principal repayments by $1,000 on each mortgage without incurring any penalties. In fact, they could have repaid $24,000 a year without getting stung with break fees.

Most cities have a free budget advisory service. They will give an unbiased opinion about financial contracts. If you’re in doubt, give them a call – they’re there to help.

If you have debt like hire purchase finance or credit card debts and a mortgage, look at the possibility of consolidating all of the debt into a single mortgage. Mortgage debt is cheaper because it offers more security for the lender.

Avoiding Financial Traps

On that note, try to avoid a hire purchase in the first place. The Retirement Commission refers to this as “dumb-debt”, and it is. Buying private cars on HP is really-dumb-debt, and borrowing to buy things like furniture, clothes, and holidays is madness. It’s bad enough these things lose value, don’t add to your problems by paying interest too.

If you use a credit card, and many people are nowadays to collect reward points, make sure you make prepayments in full and on time.

Don’t guarantee other people’s debts. We continually hear about people who are losing their homes because they have guaranteed someone else’s loan. Often the guarantor is a parent thinking they are doing the right thing for a son or daughter. It’s not always the right thing to do.

By following these simple tips and staying vigilant about debt, you can make steady progress toward financial security. Remember, it’s never too late to start managing your money wisely.

By Frank and Muriel Newman