Everyone has had debts at one time or other in their lives. Some more than others, others less so. Whether it was for a high interest credit card, a low interest student loan, a friend lending you some change or the bank lending you enough to buy a house.
No matter what the amount, what the interest charge and however long it took to pay back, there's nothing better to put a smile on your face than finally repaying that last amount back.
Help with My Mortgage
A few years ago when I bought my house, my Mum lent me just over 5% of the total house price. I had just over 5% myself so I topped over 10% for the deposit. Luckily for me, she said I didn't have to pay interest on it. Even though I got it at what was probably the worst GBP->NZD exchange rate there had been for years and ever since then I've been paying it back on a pretty bad NZD->GBP rate too (today being the worst since I first visited here in 1998) it still means that I have come out on top by not having to pay 7.85% on it for the duration of the home loan.
Over 25 years, that would work out at a lot of money, so even though I lost out in the exchange rates, I'm still up at the end of the day.
The Facts and Figures vs the Emotion
Many people say that you should pay back the highest interest debt first. Others say that you should pay back the smallest. Of course, it's never as black and white as either of those tactics and you have to choose which one (or a combination of both) is right for you.
For example, if I paid back the highest interest loan first, it means my Mum would be waiting a very long time before she sees that money back. Of course, I don't want her to wait that long so in the end, even though it's interest free, I wanted to pay her back first. Not only does she need it more than my bank does but I never like being in debt to people I know (hehe, yes, the bank is a faceless company).
I know a few people with 4 or 5 different loans and in each of those cases, there are reasons for picking neither the highest interest debt nor the smallest loan as the one to pay back first. Everybody's situation is different and you need to figure out what tactic is right for you.
The Emotional Tactic
There is another way you can pay back debt which isn't as technical as either of the above two but gleans you the most satisfaction. It's all about goals and what makes you happy. Yes, by employing one technique over another you may pay back a loan one month quicker but there's nothing better than a happy state of mind to help pay things back faster and create an even happier outlook.
Now that I've paid my Mum back, one chunk per year for the past three years, I can now get a real start on my revolving mortgage. Once that's done, the fixed-term mortgage will be in my sights.
It makes me so happy to have now removed that additional debt (no matter how small or how low the interest rate) that I'm on something of a natural high at the moment. And if you bump into me in the next few days and see that I'm grinning like a Cheshire Cat, you'll understand why.
Tell us about your debt repayment stories below.
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