Are you aiming for debt freedom? Understanding the cost of your debt can be a powerful motivator in helping you cut down on non-essential spending.
The are a couple of things it’s worth knowing, to give you a little extra push to repay that debt as quickly as you can:
How much interest you’re charged daily
If you don’t know this already, you may be surprised by how much interest you’re charged each and every day.
Let’s assume you take out a £150,000 mortgage over 25 years at a rate of 2.5%. At the start of the mortgage, you’re going to be charged daily interest of £10.27.
So before you’ve even got out of bed, you’re spending over £10. Or the equivalent of more than 4 coffees at Costa.
Makes you think twice about spending the amount of a fifth on an actual coffee, right?
To reduce your daily interest to £10 per day, you need to reduce your mortgage balance by £4,000. That might seem like a lot, but it’s a lot less than your mortgage and is a great first target to aim at.
How much you can save by overpaying
If that doesn’t work for you, perhaps the prospect of a nice juicy saving will motivate you?
Same story, if you have a £150,000 mortgage over 25 years at 2.5%, by repaying just £25 per month, you’ll save over £2,700 in interest AND be mortgage free a whole year sooner!
£25 might seem like a small amount extra when your debt is so high, but it really does make a difference.
Set a goal
Once you have the knowledge you need, the next step is to set yourself a goal and do something to shift that debt. Large debts looming over you might seem impossible to face, but setting smaller, manageable goals will help you stay focused and you’ll be able to measure the progress you’re making.
For example, you could:
- aim to reduce the daily interest by a certain amount within a specified time frame
- aim to reduce the balance by a certain amount within a specified time frame
- aim to pay your debt of a specified number of months or years early
There are lots of ways to make savings on your monthly budget. The grocery budget could be trimmed, or you could find a cheaper mobile phone contract. Shopping around for insurance quotes at renewal and regularly reviewing your energy tariff are other simple ways to save month in, month out, and throw extra money at your debts.
You don’t have to give up coffee, but you could cut one per week. You don’t have to stop going out, but you could socialise at home once per month. You don’t have to exist on bread and water, but you could eat meat free once per month.
Slowly but surely, changes you make will become habits and savings will start to snowball. Before you know it, you’ll be in your final sprint towards debt freedom!
Do you know how much your debt costs you each day or how much interest you would save by making relatively small overpayments? Do you have any other knowledge that makes it easier for you to keep pummeling your debt? Let me know in the comments below!
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