Launch Finance Director and award-winning finance broker Steve Milligan, shares the top 5 debt reduction strategies that he uses with his clients to help them get ahead of the curve.
Hi, I’m Steve Milligan from Launch Finance. Today we’re going to go through my top five debt reduction strategies.
#5 Using an offset account
At number five we’ve got your offset account. If you’re a business owner, this is actually a really good one. Rather than hold your money in a business account, earning no interest, transfer your funds into an offset account. These days you can rename your account online – rename that account to your business name. This reduces your personal mortgage using business funds. This is also good for people that hold large amounts of cash or deposits in their account. Certainly using an offset account can benefit you.
#4 Using a budget wisely
At number four we’ve got our budgets. Small savings add up to big savings. A budget’s not something you want to be a slave to, but a budget is something you should do to review your current expenses to see where you can save some money to be paid off your debt.
#3 Pay your smallest debts first
Number three is to pay your smallest debts off first. We always pay our smallest debts off first, regardless of interest rate. Then once you pay the smallest debts off, use that money to go towards the next step, and continue that until you’ve paid all of your personal debts off. It’s amazing how quick you can start paying your personal debts off using this strategy.
#2 Use the DINK principle
Number two is our DINK principle. This is our Double Income, No Kid strategy. Simply living off one person’s wage, and use the other wage to pay off debt – using our third strategy, which is paying your smallest debts off first.
#1 Working balance debt reduction strategy
And my main one is our working balance debt reduction strategy. This is really good for owner-occupier home loans. This is probably our most popular one that we use with most clients, and what it does, is it reduces the interest you pay in a similar way to an offset account. There can be a couple of variations to this one based on your lender, but the theory is pretty much the same.
So the first step is to have your pay credited into your variable rate home loan. And if you have a fixed rate home loan, this would actually be debited from your variable rate home loan. In this case, you’ll have an external general bank account. This can be an offset account if your account is with the same bank your home loans is.
Now, what we do is with our budget planner tool (available on request from [email protected]), we get you to use that to work out what your working balance is. What are working balances? That’s the amount that actually costs you to live each week, or each fortnight as per your pay cycle.
So let’s say you work out your fortnight living expenses, and let’s say they’re $2,200 per fortnight. We always get you to go up to the next $500. So what we’ll do is we’ll set your working balance at 2,500. The idea now is to top up that external balance working account to that $2,500, or whatever that figure you work out to be, each fortnight by redrawing out of your home loan and topping up that external bank account.
You do that each fortnight. So the reality is you’re starting each fortnight with your working balance, or in this case that $2,500. As you can see, I’ve put this as my number one debt reduction strategy, because in my experience, people who put their wages directly into their variable rate home loan in comparison to offset accounts, are usually better off in years to come.
So these are just suggestions that I’ve used, that most of my clients have used over the years to put themselves ahead of the curve and pay their debts down quicker.
That’s my top 5 debt reduction strategies.
– Steve Milligan