How to build up savings while paying off debt

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How to build up savings while paying off debt

Australia’s household debt has increased rapidly over the last few decades. Driven by several factors including the rising cost of living, the ever- increasing price of housing, stagnant wage growth and our consumer-driven culture, it’s easy to see how people have ended up in significant debt. For many Australians, the mortgages on their home or investment properties are their most significant debts. We’ve included some tips below give you some ideas around how you can build up your savings while still paying off debt.

Domino your debt
As Scott Pape says in The Barefoot Investor, you need to “domino your debt”. What this means is you need to review your debt to identify your highest interest loans. Common debts that Australians have include credit card debt, personal loans, vehicle financing, HECS-HELP loans, and mortgages. While each of your debts will have minimum repayments, it’s the high-interest debts such as credit card debt and high-interest personal loans that you should focus on paying off first. To make things more manageable, look into the possibility of consolidating your high-interest debt.

 

Get your budget on track
Next, you need to review your household budget to identify where your money is going and eliminate unnecessary expenditure. If you don’t have a household budget, review your bank statements for the last few months and put everything into a budget. Your budget should include fixed expenses (mortgage payments or rent, bills, transport and other expenses such as a gym membership) and the money you’ll set aside each month for other expenses.

 

Pay yourself first
In ‘Rich Dad, Poor Dad’, author Robert Kiyosaki highlighted the importance of paying yourself first. To do this, you need to transfer a percentage of your income straight to savings when you receive it. Somewhere around 10% is an excellent place to start. Over time, your savings will grow, particularly if you invest this capital in a balanced portfolio.

 

Rethink your mortgage repayments
Yes, making extra mortgage payments might seem responsible. However, this doesn’t put your money to work for you. Pay the minimum off your mortgage and transfer additional funds to an offset account.

 

Big results need small daily actions
When it comes to money, some things can seem so simple that you may not try them. These steps may not be “sexy”, and they’re not a get rich quick scheme, but these actions, over several years will pay great dividends.

 

Everyone’s financial situation is different, so make sure you speak to a financial adviser about your situation.