7 secrets to reducing your liabilities as quickly as possible.

There are seven secrets to reducing your liabilities as quickly as possible to help you grow your wealth and / or increase the equity in your home:

1.       Always pay the lowest interest rate on everything you owe.

2.       After you’ve reduced the cost of your debts, maintain the same monthly repayment. 

3.       Use a strategy to eliminate high cost credit cards

4.       Use the D.E.B.I.T.S formula to reduce your costs

5.       Use money you own to repay money you owe

6.       Make the most of pay-rises, windfalls and other income.

7.       Become a great sales person.

Each of these needs a little more context to make perfect sense, so let’s explore them one by one.

Secret #1: Always pay the lowest interest rate on everything you owe.

The maths is so simple: if you’re paying interest at 12% (as you would with many overdrafts) when you could be paying interest at 6% (as is typical of many mortgages), you are paying twice as much as you need to.  Of course not all deals are as good as they seem – you must read the small print.  A common incentive is to offer you a very low interest rate initially, which the lender is more than compensated for by charging you higher rates later on.  You could easily end up worse off. Do you know anyone who actually bothers to read the small print? Wealth-builders do! This is because they know there are no neutral decisions.

Switch to a lower rate whenever you can, but beware of penalties and charges – these are often hidden in the small print.  Timing is a key so switch at the point where charges and penalties will be minimal.

Quick win

With today’s flexible mortgages and loans, there’s absolutely no need to pay high interest rates.  You could, for example, merge your Credit Card debts into your Mortgage debt and keep paying the repayments as if you still had the Credit Card debt.  

Let’s say you had £5000 of debt on your Credit Card.  The interest rate was 15%. You paid £75 per month. This would take you 142 months to clear.  Merging this with your Mortgage debt but maintaining that £75 payment, this time into your Mortgage repayments, will clear that debt in 78 months.  You will have wiped out that particular debt in almost half the time.

Combining all your debts into your Mortgage is often the best and fastest way to reduce and then clear your debts.  

Of course, Lenders protect their profits with exit charges and penalties, so do this wisely.

Three questions can help protect you:

·         How much am I really borrowing including the set-up costs and insurance?

·         How much will it cost me over the full-term of the debt?

·         What extra charges will the lender impose if I pay off the debt early, or if I miss a payment?

Of course, you should always think carefully before turning unsecured debt into secured debt, but if you have a workable plan to become debt free, and you stick to it, you’ll be in a far stronger position.

None of this is in the interest of the lenders, so they will immediately seek to seduce you with new offers.  Say, ‘No!’ It is all too easy to make this common mistake – merging your debts then increasing your borrowing!

Research, Research, Research

How would you like £22,500 to invest or use as you choose?  That’s the difference that a 1% cheaper interest-only mortgage can make over 25 years, if the mortgage was just £90,000.  What a great example of how a bit of homework could pay off.

Wealth-Builders have an “opportunity mindset” so keep your debts as flexible as possible so that you can move them again to save more interest if the opportunity arises.

Secret #2: After you’ve reduced the cost of your debts, maintain the same monthly repayment. Ideally, pay more to your lender than you were paying before.

As I mentioned in the first secret, a key to success is to maintain your former payment when you switch to a lower cost debt.  You will have got used to the money going out each month, so without changing your lifestyle, you’ll now be reducing your debt more rapidly.  If you don’t do this, the funds you’ve freed up will disappear into your living costs as if by “magic”.

If interest rates drop, maintain your level of payments – it just means you’ll reduce your debt at an accelerated rate.  If interest rates increase, increase your payment to keep pace – being debt free is the focus and you don’t want to put off the arrival of your Debt-Free-Day.

How about paying more than before?

Unless you have fixed-rate debts, the interest rates will fluctuate.  If your interest rates went up by 3%, would you still be able to cope?  If the answer is ‘yes’, make the higher payments as if the rate has gone up.  You don’t need to pay what your lender tells you, you should pay as much as you can afford.

By practising paying a higher interest rate than is currently being charged you’ll put yourself in a stronger position to cope with rates if they do increase.

Another great way to accelerate the day when you’re free of debts is to allocate a fixed percentage of your income to help reduce your debts.  Many people start with 10%. This simply means 10% of your income goes towards clearing your debts – with no arguments! Once this becomes a habit you’ll find you have easily adapted your lifestyle to work with this powerful discipline, with no loss of quality of living.

The good news is that if you have flexible debts, you can get back any extra money you’ve overpaid if you find your level of repayments begins to affect your quality of living.

Secret #3: Strategy to eliminate high cost credit cards

You will have grown used to making a certain level of payments each month.  All debts, however, are not equal when it comes to interest rates. The next secret works well for any debts that you cannot merge into your mortgage.

First take each and every remaining debt and reduce the payments to the minimum monthly cost required by your agreements.  Then, channel the balance between this and your former total payments into the most expensive of the remaining debts. If you then stick with this plan until the debt at the highest interest rate is cleared, you can then use the same strategy with the next most expensive rate… and so on.

This is one way to really get your money working harder for you.  Be bold too, and cut up those credit cards once they’re cleared.

”Never let a month go by without taking some action to build your wealth”

– Kevin Whelan

Secret #4: Use the D.E.B.I.T.S formula to reduce your costs

As I mentioned earlier, every financial decision is a plus or minus – it is either taking you down the down escalator, or it is helping you up the up escalator.  Money is your servant who needs to work hard for you. This means that if you are really serious about owing nothing and owning everything, you need to look at the detail and not just the big picture.

Exercise: Your Ins and Outs

Take a large sheet of paper and turn it so that it is landscape rather than portrait.  Divide it into two headed columns entitled: “Money In” and “Money Out”. Under the “Money In” heading list every financial input to your life: salary, pensions, benefits, investments – and leave space for more because you’ll often find you have income from sources you’d not thought about.

Then, under the “Money Out” heading, list all your payments: tax, debt repayments, insurance, utilities, household expenses, rates, travel and motoring costs.  The easiest thing is to run through your statements to highlight your monthly expenditure. Be careful to notice any quarterly or annual payments, and convert these into their monthly equivalent.

Add up the totals, and deduct one from the other.  The result should be a positive balance in favour of your income.  This lets you see for yourself how much more capacity you may have to accelerate the day when you become totally debt free simply by increasing your payments.

There is more you can do, however, to improve your situation.  Look at your list of payments and begin to interrogate them. Are you paying too much tax?  Are your allowances correct? Could your insurance be altered now that you’ve adopted a positive lifestyle change (e.g. giving up smoking)?  Is there a more appropriate tariff for your mobile phone? What better deals are there available for your utilities?

Compounding Your Success

If you find an improvement, take action, no matter how small the saving.  This is important because saving £20 on a monthly Gas Bill represents far more than the face-value of the £20.  If that £20 saved is then used to reduce another debt, you’ll have compound interest working for you.

I can illustrate this by thinking about a Store Card.  It is not uncommon for these to have interest rates in excess of 30%.  If you put your saved £20 per month into paying off this Store Card, you’ve got that 30% working for you.  To give you an idea of the scale of the impact this can have, £20 at 30% for ten years would transform £2400 into a staggering £13,297.28!  That’s an absolute fortune saved in interest.

Secret #5: Use money you own to repay money you owe

The Banking industry was founded on a simple idea – wealthy investors would deposit their money in a bank in return for security and for some interest on their deposits.   Banks, on the other hand, would then lend that money out and charge interest. The difference between the savings rate and the lending rate led to the Bank’s profit. The same is true today.

You may well have a loan from the very same bank or building society in which you have savings.  There is a direct link between what you own and what you owe, and unless you recognise this link, you could be losing out not just once but twice.  Your income from your savings will be at a lower rate than the cost of borrowing. Furthermore, any income from your savings will attract tax.

With today’s flexible loans and mortgages you really don’t need to have savings for a rainy day – not if you’ve got loans.  The secret is to use money you own to pay off money you owe. Let me illustrate with a quick example. If you have £10,000 on an overdraft at 12%, this will cost you £1,200 per year in interest alone.  You might also have £6000 in savings laid aside for emergencies. If this earned 4% interest before tax (or lower as is the case in the current climate), you’ll be left with 3.2% after tax at the basic rate.  That’s £192 income per annum. This means that if you maintain this arrangement, you will pay out £1008 in interest (£1,200 – £192).

If, instead, you use the £6000 to reduce your overdraft to £4000, the overdraft rate of 12% will cost you £480 in interest.  That liberates £528 that you would otherwise have given to your bank under the former arrangement. Yes, that means you’re £528 better off a year!  The overdraft is a flexible solution – so you’ve kept control and if you need to draw in an emergency, you’ve still got the facility. Your savings just were not working hard enough for you.

Taking cash that you own to repay money you owe is the most straight-forward, tax efficient, guaranteed, risk-free solution to making your money work hard for you.  Since it works, every time, it becomes an easy and exciting step on your adventure to becoming debt free.

Connecting your income to your debts

It can get even better.  With some research you can find banks, loan and credit card companies that will link your bank account to your borrowing on your behalf – saving you time.  These innovative lenders offset your income against your borrowing.  Let’s say you have a mortgage of £72,000 with the same bank your salary is paid into, and that the accounts are linked.  The interest accruing on many mortgages is calculated on a daily basis. If you receive a salary payment of £2000, under this system the £2000 will be taken off the £72,000 and interest will be charged only on £70,000 that day.  This means that your salary is effectively earning the same rate of interest as your mortgage and doing this tax free.  If that £2000 remained in your normal bank account, any interest earned would be taxable.

Using an innovative system like this links your bank account to your borrowings, and ensures that all your money coming in is immediately offset against your debts.  In this time-saving, stress-free system, you’ll minimise your interest payments and save tax too.

Secret #6: Make the most of pay-rises, windfalls and other income.

Once being debt-free becomes your focus, you’ll find fresh motivation to turn this quest into great fun.  Financial ‘fitness’ can become a healthy obsession, just like many people get hooked on physical fitness.

A debt-free focus like this will really benefit from setting up rules that are non-negotiable and so take no effort or thought.  One such rule should be to set aside a fixed-percentage of any fresh income to further your journey towards debt-free status. That could be 10% or even a more daring 25%.  Of course, this dove-tails with our second secret where I suggested you set aside a fixed-percentage of all your income for clearing your debts more quickly. Here, I’m simply suggesting you get more daring and elevate the percentage for unexpected increases in income.  Don’t wait until it happens, set up the rule in advance – then you’ll have no cause to hesitate.

When you are in debt, you have, in a sense ‘mortgaged’ your future.  You’ve traded your future income-earning potential to live in the present.  This makes you vulnerable since your ability to earn can easily change at any moment.  You may not want to work in the future, and you may not be able to work in the future. You could even be unemployed.  Those thoughts can become positive motivators. When an opportunity arises to work a few extra hours each week, you can see this as taking back your future income.  A little more effort now frees your future.

With that in mind, you can have fun with this too.  “Overtime” is a quick win. Alternatively, having an additional part-time job will give you variety, income, and the chance to mix with a different group of people – after all one of the key benefits of work is the social aspect, another facet of true Wealth.

If you are feeling more adventurous still, you could start your own business and use the extra money to reduce your borrowings (an exciting concept covered in my chapter on the 5th Pillar, “Own Business”!)  If this business harnessed a hobby you were particularly interested in, you’ll be amazed at how motivated and successful you can be and at the amazing tax advantages!

Secret #7: Become a great sales person.

Wouldn’t you like to reclaim your storage space and get some cash in the process?  Storage space is a liability if it’s not earning you money!  With technology changing by the day, it’s all too easy to end up with hardware you just don’t use anymore.  Add to that sports equipment from the hobby you lost interest in, clothes that don’t fit or have gone out of fashion, and things that you haven’t used for months – and all of a sudden you’ve got a resource you can transform into cash.

Take a good look around your home, loft, and garage and identify unused items of value.  To maximise the benefit, make a list and include everything you don’t need or haven’t used for six months.  Either you will end up with much you can sell, or you’ll remember the value of your investments and get some fresh pleasure from them.  Either way, you win!

By now, you’ll be getting good at research, so find out how much you could raise, then put your sales’ hat on.  You may even be able to knock thousands off your debt – just with resources you’ve got but don’t use. From Car-Boot Sales to eBay, from Amazon to the local paper, it’s never been easier to advertise and sell your ‘stuff’!