Yesterday, I explained why I decided to pay off my house in an ambitious timeframe. Others’ reasons for something like this will probably be different to mine. However, any big decision such as this requires a clear commitment – to yourself (or to each other if you’re married) – to actually do so. And it needs a ton of effort.
First off, however, accept and understand that paying off a mountain of credit card debt or a car or even a house in an aggressive timeframe is not impossible! This has been done before (and there are no penalties for doing it). Again, I found myself surprised recently by a reader who had managed to pay off their car and was well on their way to settling a credit card balance in preparation for the undoubtedly tough months (or years?) ahead. Your goal might be something as deceptively “modest” as a R100 000 personal loan.
To many, the mechanics of how to pay extra are a mystery. This really ought not to be. Simply transfer/pay extra money into your loan accounts as if you were moving money between a current account and a credit card. It is really that simple.
I’ve been reflecting on the past five years for some time before writing this and appreciate that the potential benefits to those reading it far outweigh whatever privacy I give up in sharing some of this information. Some might argue that a lot of this is ‘common sense’, but if it really was, wouldn’t everyone be debt-free?
Adjust your lifestyle (downwards!)
When I decided to attempt to be debt-free by age 35, the most important philosophical change I had to make in life was to live below my means. This ought to be the case in all your spending, but is especially true in the two largest purchases you’ll likely ever make: your car and your house. Very simply, buy below what you can afford. Because cars are depreciating assets, we all know this already (but most people don’t heed this advice!)
But, the impact on a residential property purchase is particularly profound because of the sheer sum of money involved.
If you think you can afford a R2 million house, buy a R1.2 million one. If you think you can afford a R1.2 million house, buy a R800 000 one. So often people get caught out with all the hidden costs of home ownership. Things like levies, rates, insurance, incidentals and maintenance can easily add R5 000 to your monthly bill. Suddenly that ‘affordable’ R20 000-a-month repayment is a real stretch when all-in, it’s R25 000. From that position, it’s easy to go backwards quickly.
And buying ‘down’ doesn’t necessarily mean you need to live 100 miles from anywhere. You could, for example, live in Douglasdale (or Tableview) at half the cost of Parkhurst (or Sea Point).
Get a grip on your spending
Budgeting is something I learnt before trying to prove that I could pull this off. But, the detail and discipline had to be taken to another level entirely.
First, track every cent that comes into or leaves your bank accounts every month. Categorise this into useful buckets such as food, fuel/transport, discretionary, etc. Within two or three months, you’ll have an unbelievably clear understanding of what you spend – and waste – your money on. Once you know this, you’ll be able to figure out what to cut back on.
Next, interrogate every single debit order on your cheque account and figure out how many you can get rid of. Nix clothing accounts, mobile phone contracts (if you can), and the like. You’ll probably be stuck with insurance, a gym membership, medical aid and possibly pay TV and a car repayment.
Then, look at the recurring payments you make monthly, such as rates/electricity or car repayments, and see if there’s any wiggle room there. Some of these are not necessities.
From here, you should be able to draw up an accurate budget that you’ll be able to stick to. That doesn’t mean that a budget is fixed forever. There will be seasonality in it (April looks different to August, for example, and look at your historical spending to understand these subtleties), and expect to make minor refinements as you go.
In my case, I know exactly how much I’m going to spend on what before the month starts.
If, for example, you’ve “had” to buy that half-price pair of jeans on Black Friday (sometimes, there is merit to spending to save), then other adjustments have to be made to ensure you still end the month within budget. So, for example, you’ll need to find that R400 from eating out on one less occasion during the month. It’s so tempting to slip slightly and ‘promise’ to make up that R1 000 ‘next month’. Never fall into this trap because you’ll almost certainly not make it up. (Happily, I’ve continued this budgeting and tracking habit since settling my home loan).
Get rid of ‘bad’ debt
When you’re tackling a large amount of long-term debt, short-term debt gets in the way. It is not logical to try pay off a bond while juggling car repayments, credit card bills and other loans. As you’re drawing up and refining your budget, focus on aggressively paying off any short-term debt, like a personal loan or credit card. There is merit in using your credit card as a debit card, in other words paying it off in full at the end of every month, but this is a nice-to-have for most people.
After the short-term loans, deal with the next largest: your car. Stop buying a new car every two/three/four years. Buy a reliable car, one that is 20% to 25% below what you think you can afford, and pay it off as quickly as you can.
This is the game-plan that I followed. Fortuitously, I didn’t have any short-term debt other than my car when I started paying off my bond and even then, I’d made decent headway in settling it.
Save, save, save
Figure out how much extra you’re able to put into your bond every month, and use this as a minimum target. Don’t stop there. Set an aggressive one as well. Over time, you should end up somewhere in the middle. I diverted every extra cent I had into my bond. I liquidated two smallish “emergency” savings accounts and transferred that money into my home loan. I have never had the luxury of a structured corporate pension/retirement annuity (RA). Aside from my annual tax-free savings account allocation, I elected to route any additional money into my bond rather than unit trusts, RAs and the like (why I’m not a fan of RAs is a story for another day). This is not going to be the best course of action for everyone, but I did the maths and decided it was for me.
At 10%-a-year interest, I was certainly way better off than the below-inflation ‘returns’ I was earning in them before. Plus compounding works both ways: these one-off extra payments made an outsized difference, alongside the fact that I was, on average, paying more than twice what I should’ve been each month.
Put simply: at the start of a 20-year bond, your monthly payment is almost entirely towards interest. Once you start making a dent in the capital, even a modest one, you’re paying off more and more of it (and less and less towards interest) each month.
Here’s a simple view of a R1 million bond (at 10%), with double the payment each month (R20 000 vs R10 000 in round numbers)… The impact is absolutely staggering:
Can you find an ‘extra’ R5 000 or R10 000 a month to put into your bond? Without getting into intricate details, or making assumptions about your specific circumstances, I’m almost certain you can. It just takes effort, and discipline.
Still on saving, I got into the habit of clearing “extra” cash out of my current account after bills were paid each month, knowing that I had access to it in the bond (not that I moved as much as R1 back… discipline!) Even a few hundred rand in unexpected cashbacks from Vitality, for example. It all adds up.
Shop the sales (I’ve written more than enough about this previously) and cancel the luxuries until you reach your goal. Of course, we’d all like to go on an overseas holiday every year. Did I? Not while I was paying off my house, no.
Put any unexpected windfalls (the obvious one is an annual bonus) into your bond and try hard not to adjust ‘into’ your annual increase. Try keep your spending at the same level as the prior year (or better, cut it!) and put that extra money into your bond. This is not easy. But, it’s doable.
Beyond this, chances are that you’ve got some extra money lying around your house without you even recognising it. That extra TV in the spare room that no one ever uses? The two old iPhones in the drawer? The old washing machine in the garage. Sell it all; it is of no use to you. Even a few thousand rand makes a difference.
A second income is a reality these days. Look for those kinds of opportunities – they are plentiful – and understand the value of your time.
Once it’s done
Here’s the kicker: once your house is paid off – much like your car – forgo the temptation to upgrade thereafter. In fact, make a deliberate decision to not move into something bigger and better once your property is paid off. I’m finding this harder than expected.
Rather, use the runway over the next five to ten years to build some wealth. I referenced yesterday that my saving in unpaid interest over the next 15 years is R1.2 million (I would’ve still been paying off this house in 2035!) The trick now is to turn that into substantially more within the next decade-and-a-half, after inflation. That’s my next goal….
Hilton Tarrant works at immedia. He can still be contacted at email@example.com.
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