Paying everything off strategies

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Paying everything off strategies

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sally_in_wales
Downsizer Moderator

Joined: 06 Mar 2005
Posts: 20809
Location: sunny wales

Posted: Sat Jul 02, 05 1:32 pm Post subject: Paying everything off strategies

Has anyone here ever had a really proper, serious go at one of the common sense budgeting strategies that aim to have everything paid off in just a few years without having to seriously reduce ones lifestyle. I'll attempt to explain cos I think I'm being a bit vague today... The idea is that you work out exactly what you spend now, and also list all your debts (house, car, any loans), regular outgoings etc, leaving you, in theory, with a small 'surplus' sum each month from your income. May only be ï¿½5, but most of us have a little bit that isn't 100% earmarked for bills, food and day to day essentials. Then you systematically start paying off the debts starting with whichever one is easiest to pay more into. As you pay off each debt, this frees up more cash, so the next debt is paid off even faster. I think the idea is as long as you channel the cash into the next payment as soon as one is got rid off, you can have things like mortgages paid up in just a few years based on an average income and lifestyle.
I'm sure there is some fancy name for doing this, but I'm thinking of a common sense version. Anyway, I want to start doing this as we don't have very many debts beyond the house and a small loan- I think we must owe perhaps two years wages in total if I look at it that way, and we have one of those flexible mortgages where we could in theory pay it off as fast as we like- but I'd welcome any observations from anyone who has actually done this successfully - there must be some tips and tricks even if its just at the assessing ones situation stage.

JonO

Joined: 05 Mar 2005
Posts: 119
Location: South Birmingham

Posted: Sat Jul 02, 05 1:48 pm Post subject:

I've just got to that stage were I've accessed myself and my debts etc and started along that line, but only just starting. I found one site very useful :

www.moneysavingexpert.co.uk

There is a section on debts and which way to do things (Paying off higher interest first etc) and also what I have done is remortgaged, changed my current account and my credit cards to much better deals so that my money thats going towards paying them off it going a bit further.

Good luck !

monkey1973

Joined: 17 Jan 2005
Posts: 683
Location: Bonnie scotland

Posted: Sat Jul 02, 05 1:54 pm Post subject:

Sally,

What I found was, when I got wise to my wasteful consumerism, that I ended up with more money available to pay off debts and the like. After we got married we had a stack of debt by way of personal loans and it took us a long time to clear it, but clear it we did.
Your proposed philosophy is spot on. Whenever we came into some money, bonuses etc we would pay a chunk off a debt.
My Gran always told me that before I do anything I should be clear of my mortgage and that was what we endeavoured to do. We were lucky in away that we bought our current cottage when the market was slow (6 years ago) and therefore the mortgage was small (by todays standards). Our cottage is small but it fulfills our needs and we see no need to 'upsize' which is a useful situation. We have a little left to payoff and if it wasn't for the current mortgage tie-in we would have cleared that already.
The downside of the above is that I feel, sometimes, that I am missing out on the property ladder climbs that many of my friends and family are making. My brother, for example, has a house worth about ï¿½250,000 but it still fills me with dread to think how much his mortgage would be.

jema
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 28239
Location: escaped from Swindon

Posted: Sat Jul 02, 05 1:55 pm Post subject:

I do think that taking control of money is vital to "living in control" and that is for me at least part of what downsizing is meant to be about.

Whilst I am no shining example on this score, we have at least no credit card debts and make an effort to pay as much as can be spared into the mortgage.

But frankly I think that unless you have eliminated or have a trival mortgage or otherwise have a stack of dosh, then you are still a slave to the system

sally_in_wales
Downsizer Moderator

Joined: 06 Mar 2005
Posts: 20809
Location: sunny wales

Posted: Sat Jul 02, 05 2:09 pm Post subject:

I reckon we owe no more than about ï¿½35,000 including the mortgage, so getting it paid off in short order should be perfectly achievable. I just need to get my head around how to accurately list everything (taking account of things like interest rates as well as the current amount owed) in order to prioritise what needs paying off first and how best to then stockpile cash for more exciting possibilities like a move to somewhere with a little bit of land at some point or revanping this place to the point where its efficient and we can be a bit more self sufficient. Does anyone know of an online 'calculator' that helps one track debts, outgoings, income and so on? If not I'll have a bash at creating one but I'm not very good with spreadsheets!

monkey1973

Joined: 17 Jan 2005
Posts: 683
Location: Bonnie scotland

Posted: Sat Jul 02, 05 2:36 pm Post subject:

I don't have anything like that unfortunately. Obviously paying off credit cards and personal loans would be priority number one as they are the highest interest.
Try and create a simple monthly budget sheet listing income and more importantly outgoings and then assess you outgoings to determine what you could delete straight off the bat. I appreciate that as a downsizer you probably don't have any outgoings other than those that are strictly necessary but you never know. Surely that gym membership can go!

Another tip would be to split your bills from you spending and give yourself an allowance that you stick to to spend for the month. Obviously leave enough in the bills to cover the necessities but leave a little extra also. If you stick to your budget well then the surpluss will build up and you can then put that elsewhere or use it to pay off the car insurance in one go instead of by DD.
I now pay most of my insurances in one go and it saves on the interest they usually charge for paying it in bits.

ButteryHOLsomeness

Joined: 03 Apr 2005
Posts: 770

Posted: Sat Jul 02, 05 4:07 pm Post subject:

sally_in_wales wrote:

i think the MSE (martin, mentioned earlier in this thread) has an online budget that's supposed to be very detailed, he may also have a tracker for you as well, worth a look!

Bugs

Joined: 28 Oct 2004
Posts: 10744

Posted: Sat Jul 02, 05 7:03 pm Post subject:

ButteryHOLsomeness wrote:

i think the MSE (martin, mentioned earlier in this thread) has an online budget that's supposed to be very detailed, he may also have a tracker for you as well, worth a look!

Definitely does, haven't used it myself, but I know it is updated frequently and is in Excel format. I think that would definitely be worth taking a look at as would the various articles and forums as JonO says (only don't leave us, they're very nice over there but we're nicer

)

Treacodactyl
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 25795
Location: Jumping on the bandwagon of opportunism

Posted: Sat Jul 02, 05 7:44 pm Post subject:

I'm not sure if I've ever looked at a strategy but I've certainly decided to pay off any debts as a matter of priority. I think I'm lucky that I don't need to plan is just seems second nature. It helps that Bugs and I aren't keen on things like package holidays, buying the latest fashionable items and eating out. (It helps when some of the local eateries think ham is vegetarian

)

Now we've got used to cooking for ourselves and we both hate shopping it's quite easy for us to save, not having children also helps a great deal I suppose. The problem I have now is how to save for the next step up to buy a smallholding.

Going back to paying off loans, it's best to pay off highest APR loans first or consolidating everything into a flexible mortgage where you can over pay or take out money at a good rate of interest - that way you don't need to have savings for an emergency as you can always take out money on the mortgage. However, this is only suitable for people who are not likely to spend the extra cash. (If you're not sure what you're doing then it's best to take some advice first, especially if there are any loan tie-ins etc.)

Andrea

Joined: 02 May 2005
Posts: 2260
Location: Portugal

Posted: Sun Jul 03, 05 9:36 am Post subject:

I still have a whopping mortgage, but have paid off everything else & am working on the mortgage.

This is my system now ...

I have two current accounts. Incomings go into account A, and account B is set up with all the direct debits / standing orders relating to the house & bills. Each month I pay a sum from account A to account B to cover them. When I calculated this, I took into account that things like life assurance are paid annually to take advantage of discounts fo doing so, & I pay a share per month plus a little over to build up a small 'cushion'.

Everything remaining in account A is then mine to do with as I please without having to worry about bills being paid.

I have a bunch of credit cards all set up to pay off in full monthly by standing order. All day to day expenditure goes on those - petrol, shopping etc. As they are paid off in full each month I benefit from having the cash in my account for an extra month and from the credit card incentive schemes. The cards I put the bulk of my spending through are Alliance & Leicester as it's a cash back card & I get an annual cheque (free money as they don't make a penny from me!) & Tescos as I get the vouchers.

At the end of each month, any money remaining in my account gets transferred into a high interest account (currently an ISA) where it's out of bounds to me.

My mortgage is set up on an interest only basis, calculated annually. I transfer the balance of the ISA into it just before the interest is due to be calculated, theoretically allowing me the benefit of the interest.

In practice, the amounts I'm able to put by are laughably small, and I'm getting quite concerned about what's going to happen then the capital sum is due for repayment, but the system works well PROVIDING that the difference between your mortage interest rate & savings interest rates works in your favour.

Treacodactyl
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 25795
Location: Jumping on the bandwagon of opportunism

Posted: Sun Jul 03, 05 3:55 pm Post subject:

Andrea wrote:

My mortgage is set up on an interest only basis, calculated annually. I transfer the balance of the ISA into it just before the interest is due to be calculated, theoretically allowing me the benefit of the interest.

As I understand annual mortgages they still work out interest on a daily or monthly basis and only add it to the bill at the end of the year. For example if you have ï¿½10k left and pay off 5k with 5 days to go in the year, you still end up paying interest on ï¿½10k for 360 days and ï¿½5 for 5 days. That's why it is often better to pay into a mortgage as soon as you get the money if there are no penalties. Also mortgage rates are often higher than any interest rate you can get. If you're savings are not kept in an ISA then you also can lose out on tax on the interest on your savings.

I'm sure someone will correct me if I'm wrong and it's best to check the details of your own mortgage. There are also 'offset' mortgages but I don't know too much about them.

Andrea

Joined: 02 May 2005
Posts: 2260
Location: Portugal

Posted: Sun Jul 03, 05 5:17 pm Post subject:

Treacodactyl wrote:

As I understand annual mortgages they still work out interest on a daily or monthly basis and only add it to the bill at the end of the year.

Probably true! Mine was set up some time ago as part of a package designed to pay off your mortgage early & may well no longer be offered. I've dumped the company who set it up as they were expensive, but have kept the parts of the package which suited.

tawny owl

Joined: 29 Apr 2005
Posts: 563
Location: Hampshire

Posted: Fri Jul 08, 05 10:09 am Post subject:

Treacodactyl wrote:

As I understand annual mortgages they still work out interest on a daily or monthly basis and only add it to the bill at the end of the year.

Yes, it does. Annual interest is a con - just about everyone would be better off with daily interest, even if they're only making their normal monthly payments.

Treacodactyl wrote:

There are also 'offset' mortgages but I don't know too much about them.

There are basically two types of these: 'offset', where any savings you have in a savings account are offset against the mortgage account, and 'current account' mortgages (best known is the One account), where everything (mortgage, savings and current account) is in the one single account. In practice, though, they're often lumped together on most of the money websites.

Advantages
You can pay off extra every month, or pay lump sums in when you have it. This is particularly useful for self-employed people, as you can stick you tax money in there and leave it till you absolutely have to pay Mr Brown's minions. Beware, though - some offsets allow you to put money in, but not take it out again!
With a current account one in particular, you can really pay off a lot of money, simply by having all your direct debits come out at the end of the month, thus leaving your savings untouched for as long as possible, and it's painless.
Because your savings are paying off a debt, any interest earned is tax-free - that's an extra 20-odd % at least. You would not be able to get anything like this in an ordinary savings account, even an ISA.
Most people are used to thinking of the mortgage as separate from their 'debts', whereas in reality, it's the biggest debt they've got. Seeing all those noughts with 'OD' after them can really shock people into paying it off.

Disadvantages
You need to be disciplined, and realise that all that 'extra' money you can take out is not yours - it belongs to the bank and it's got to be paid off eventually, so thee mortgages are not suitable for people who are erratic big spenders.
Interest rates are often a bit higher - nevertheless (and ignore any financial advisors who tell you otherwise; these accounts are not in their interest), most people, even those with quite small savings, will be better off with these mortgages.

Andrea, I would think very seriously about looking again at your mortgage. If you're only paying off the interest, then unless you have a very good insurance policy to pay it off, you will be in trouble later on, because the debt isn't getting any smaller, and thus the interest is being charged on the full whack. With a repayment mortgage, once you reach the halfway point, more money is paying off the debt than it is the interest, and so you can pay it off much more quickly.

The idea of cashback cards is a good one, as long as you pay off in full every month. In your shoes, I'd probably also get rid of account A and change that to a savings account, as most current accounts give pathetic interest, and you could still set up a standing order to transfer money into account B, and set up your credit card direct debit to come from there as well, so there's no chance of you ever forgetting to pay your credit card and incurring bank charges. Also, if you haven't looked at your bank accounts in a while, check out the rate on account B - you might get a better rate with an internet or post/telephone account.

Treacodactyl
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 25795
Location: Jumping on the bandwagon of opportunism

Posted: Fri Jul 08, 05 11:30 am Post subject:

tawny owl wrote:

Disadvantages
You need to be disciplined, and realise that all that 'extra' money you can take out is not yours - it belongs to the bank and it's got to be paid off eventually, so thee mortgages are not suitable for people who are erratic big spenders.
Interest rates are often a bit higher - nevertheless (and ignore any financial advisors who tell you otherwise; these accounts are not in their interest), most people, even those with quite small savings, will be better off with these mortgages.

After my post Which? have done a review of offset mortgages. They do conclude you need reasonable savings of about 10-20% of the mortgage value compared to a variable mortgage where you can get a discount. Which? is often available in libraries if you cannot get hold of a copy.

However, you would need to be prepared to move the mortgage every couple of years to get the best deal so an offset would be better than nothing. I went for a flexible mortgage that had a discount and allows any amount to be paid off, as long as there is still ï¿½1 in it, without penalty and also allows the money to be drawn out.

tawny owl

Joined: 29 Apr 2005
Posts: 563
Location: Hampshire

Posted: Fri Jul 08, 05 1:22 pm Post subject:

Treacodactyl wrote:

However, you would need to be prepared to move the mortgage every couple of years to get the best deal so an offset would be better than nothing. I went for a flexible mortgage that had a discount and allows any amount to be paid off, as long as there is still ï¿½1 in it, without penalty and also allows the money to be drawn out.

Exactly, which most people wouldn't do (and even if they did, the fact that it's become a lot more expensive to change mortgages since the banks/BSs realised people were doing so would probably wipe out any money gained). They also compare 'offset' as meaning any of those types of mortgage, instead of splitting them up into offset and current account ones - the latter being better because there's more money paying it off, i.e. your entire salary (even if it's only in there a week) rather than the proportion you feel you can allocate to savings.

I went for the type you mention above too, and although I'm glad I did (we've already managed to knock 9 months off it), I will be moving to a CAM next year when I've got 3 years' accounts and thus have a wider choice. I'll then be moving both our individual accounts and ou joint account and re-timing all DDs so the money stays in as long as possible. I reckon if I do that we'll be able to pay it off about 3 years early.

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