How to Get Out of Debt Faster, Part 2
Use these tactics to reduce your debt balances ahead of schedule so you can save money and build wealth instead.
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This is the second in a two-part series about how to get out of debt faster. Part one gave you 5 tactics to reduce the interest rates on your debt so you can make lower monthly payments and use the savings to pay down balances ahead of schedule.
In this segment, I’ll cover another major strategy: Reducing your principal, or the actual amount of debt that you owe.>
Use Assets to Pay Down Debt
The easiest way to reduce your debt is to pay it down using cash savings. I realize that most people don’t have a big stash of excess cash lying around. But think about what assets you own—like investments, cars, boats, equipment, or jewelry—that you could sell to raise cash.
Paying off a debt that’s charging you 20% interest is just like finding an investment with a guaranteed 20% rate of return that’s tax free! In other words, parting with your cash to get rid of expensive debt is a smart financial move.
However, don’t use every penny of your cash to eliminate debt. It’s still important to keep a reasonable cash cushion that would keep you safe in an emergency. Additionally, never take an early withdrawal or borrow from a 401(k) or IRA to pay off debt. The benefits you give up and the penalties you have to pay when you tinker with a retirement account are just too high.
Use Biweekly Payments to Pay Down Debt
Many people want to know if it’s smart to get rid of their home mortgage as soon as possible. Since mortgages have relatively low interest rates and come with a tax deduction, they’re the last debt you should pay off. For more on this topic be sure to read or listen to Whether to Invest or Pay Down Debt.
However, if you want to whittle down your mortgage balance faster, here’s a clever way to do it: Pay one half of your monthly mortgage payment every other week or biweekly. There are 52 weeks in a year, so you’d make 26 half payments. That’s the equivalent of making 13 full payments in a year, instead of 12. Making biweekly payments is a really easy way to get one extra monthly payment made each year, especially if you get paid every other week.
If you have a 30-year, $200,000 mortgage with a 5% interest rate, making biweekly payments could save you close to $35,000 and allow you to pay it off 5 years ahead of schedule! Enter your loan information into the BiWeekly Payment Calculator at dinkytown.com to see the difference biweekly payments could make for you.
By the way, this tactic works for any kind of installment loan, not just mortgages. Just make sure that your loan doesn’t include a prepayment penalty for paying it down early. And watch your statements carefully to make sure that the lender applies your biweekly payments correctly.