???I’m loving the flurry of attention – and innovation – being given to round-ups.
It began with the Acorns “fractional” investment app, which collects your virtual “loose change” and almost immediately funnels it into a diversified portfolio of your choice. The concept is now being applied to some banks’ ordinary transaction and savings accounts (for example, your everyday purchases may get rounded up and that money squirreled into your savings account) and even by a superannuation fund.
This is inconspicuous and unobtrusive future-proofing ??? because micro-saving and, in particular, micro-investing has maximum bearing on your life. Just $6 a day invested at 8 per cent from age 20 will make you a millionaire at 65. Better still, only about $100,000 will have come out of your pocket; nearly $900,000 will be “free” investment returns.
Wait 20 years to start, though, and you’ll need to find $35 a day (and save more than $300,000 yourself).
Round-up apps and features make saving automatic and therefore, psychologically, pretty pain-free.
But there are ways to use similar mind tricks, without waiting for the next bells-and-whistles product, to pay down your mortgage quickly and easily – and save a fortune. Trick 1: “Round up” your repayment
If you’re like most people, a set amount is whisked out of your account each month for the mortgage. Say you’re the average Aussie with an average $369,600 home loan on an average 5 per cent interest rate (of course you should be paying less). Your required monthly repayments are $2161 but without too much discomfort to your brain or budget, you could round that up to $2200 ??? and save more than $11,000 and get out of debt nearly a year early.
Just be sure to re-set your direct debit so there’s never any active deliberation.
By the way, never adjust your mortgage repayments down. You’ve already got your head – and your hip pocket – around that level of repayment. If the minimum falls, you’re making a “bonus” overpayment that will save you significant money and time. Trick 2: Make your repayments more frequently
You may never have given thanks for our Gregorian calendar. But you should start, because you can use it to make an extra repayment every year and barely notice.
Although there are 12 months in a year, there are not double that number of fortnights, 24, but 26. So if you very simply makehalfyour required monthly repayments instead fortnightly, you’ll be ahead by a full month. Don’t ask your lender, whatever you do, to simply switch your repayments to fortnightly – they will adjust the amount so that you’re in debt the full 25 or 30 years and so pay them the full whack of interest. You need to figure out yourself what is half, and then simply establish that direct debit.
On our model mortgage, above, the saving from repaying $1081 fortnightly versus $2161 monthly, is almost $45,000 and debt freedom 3.5 years early.
This works if weekly repayments better suit your pay cycle, too. There are not (12 x 4) 48 weeks in a year – but 52. So if you make one quarter of your required monthly repayments weekly, you’ll also be ahead a full month. Trick 3: Use every dollar twice
A magic little Aussie invention called an offset account lets you use every dollar twice. A savings account that runs parallel to your mortgage, it nets off 100 per cent off any money you have in it against your home loan balance. So if you have a $100,000 mortgage and $5000 in an offset, you’ll pay interest only on $95,000.
You might have separate savings for a holiday, for your next car, for kids’ school fees ??? you should instead be putting every single dollar – which you get to keep – in an offset account. That way you get to use it for its intended purposeandto save dramatic interest.
Let’s assume you have the average mortgage and an average of $10,000 sitting in your offset. You’ll save more than $22,000 in interest, and almost a year and a half.
You could also take this to a higher level by getting your salary/ies paid in and using a credit card for all your expenses, shifting the money out only when your credit card bill is due each month. At which point more salary should go in ??? Trick 4: Make it a race
n interest rates are at all-time lows so, now, you have a once-in-a-lifetime chance to repay your debt cheaper and faster than ever before. Do so at an average 7 per cent rate and the total cost of your average house will be $784,000. Do so at 5 per cent and that falls by about $200,000 to $585,000. And you save even more when you repay extra … even if you trick yourself into it!
Nicole Pedersen-McKinnon is a commentator and educator who presents her Smart Money Start, fun financial literacy incursion, in high schools around . Follow Nicole on Facebook.