Today I wanted to talk about something that I have come across a few times now when helping people with their budget.
As all of my readers know, I have declared my financial independence.
Everyone has a different goals on how to achieve financial independence.
Some people want to own a big investment portfolio, while others may want 50 investment properties (eg Paula Pant).
Me…. I just want to become debt free and that means no more mortgage!
To achieve paying off my mortgage early one of the primary ways to do this is to make extra repayments.
This leads me to the point of this post.
During my travels I came across someone that told me that they were on track to pay off their home loan within 5 years.
That’s awesome! well done! I thought. Until we looked a little deeper into their finances.
As I went through their bank statements it very quickly came apparent that they were being charged over $145 per month in interest on their credit card balance.
They had enough redraw available in their mortgage to pay off the credit card.
When I suggested that they should redraw the extra from their home loan to pay off the credit card debt they stated “but I want to pay my home loan off early and I’m on track for 5 years.”
I explained to them that their home loan interest rate was 4.35% and their credit card interest rate was 21.45%.
I explain that they are not saving any money in interest and in fact they were paying more than they needed to.
I also suggested that they look at the whole debt they owe not just “sections” of debt.
They were still adamant that they wanted to keep the extra payments on their home loan.
I finally got through to them by explaining that they are essentially borrowing money off their credit card at a rate of 21.45% to make “extra” repayments on their home loan to save 4.35%.
They were paying an extra 17.10% interest when they didn’t need to be!
I nearly fell over!
Their extra repayments on their mortgage were attacking them from behind and they didn’t realize it!
You see, sometimes we are so focused on achieving our financial goals that we get tunnel vision.
We should be reviewing our financial situation at least yearly and adjusting our goals if need be.
As many of you know, I do not have any consumer debt.
My sole debt is my mortgage.
I encourage anyone reading this to do the same.
This year alone I was able to save over $4800 on my mortgage by simply switching banks.
If the person I mention above had been reviewing their financial situation and looking at the big picture they would have seen that for the last 10 months they had paid $1450 in interest.
That $1450 would have been avoided if they just paid the credit card balance off monthly instead of trying to put extra money on their mortgage that they couldn’t afford.
Now I have set them up with a simple account strategy that is easy to manage and is pretty much automatic.
It is working and they have $11,000 saved (in cash) since January.
They still have a credit card but they do not carry any debt on the card because they have learnt to live within their means.
Manage your debt…. don’t let debt manage you.
- If you are getting charged interest on your credit card, analyse why. You should be doing all you can to avoid interest charges on a credit card.
- Review your whole financial picture regularly. The financial forest is lush tropical and HUGE! and also can be very very green if you don’t concentrate on one tree. Look a the whole forest.
- Live within your means and wage war on debt. Kick debts arse.
Have you ever paid extra interest to the banks when you shouldn’t have had to?
win at money with me,