I often work with clients who are looking to pay off their loans as quickly and efficiently as possible. They want to reduce their debt so they can improve their financial health, credit score and ultimately their ability to borrow money from the bank for an investment property or home purchase.
No doubt you’ve heard of the domino effect for reducing debt, and for good reason, it’s one of the most effective!
The domino effect is a simple concept that can be applied to debt repayment. The idea is to focus on paying off your smallest debt first, then using the money that you were previously putting towards that debt to pay off the next smallest debt, and so on.
By focusing on the smallest debts first, you can gain momentum and see progress quickly, which can help to motivate you to continue paying off your debts. This mindset is incredibly important as you work to improve your financial situation – paying off even a $100 loan to a friend that you’ve been putting off can help to propel you further into debt reduction.
How to use the domino effect
To use the domino effect, the first step is to make a list of all of your debts, including the balance and interest rate for each one. Then, order the debts from smallest to largest. Once you have your list, start by focusing all of your extra money and resources on paying off the smallest debt first. This might mean cutting back on expenses, working overtime, or finding ways to generate additional income. You might even be able to renegotiate the terms of the loan, reduce the interest owing or consolidate some of the loans into fewer payments.
Once the smallest debt is paid off, take the money that you were previously putting towards that debt and use it to pay off the next smallest debt. As you continue paying off each debt, you will have more and more money to put towards the next debt, creating a snowball – or domino – effect.
The key to the domino effect is to stay committed and disciplined. It can be tempting to use the extra money for other expenses or to take a break from debt repayment, but it is important to stay focused on your goal of becoming debt-free. This will have so many positive benefits in your life, especially when you want to use the money you used to have to put aside for debt repayments to actually create financial freedom for yourself through investments.
The domino effect is a simple but powerful strategy for paying off loans and becoming debt-free. If you set up automatic transfers from your bank account to your debts you don’t have to think about it, just watch the debts go down each month. As a mortgage broker, I often recommend this approach to my clients, as it can be an effective way to gain momentum and see progress quickly. If you are struggling with debt, consider using the domino effect to help you achieve your financial goals. And as always, consult a financial planner or specialist for specific advice tailored to your situation.
If you’re ready to speak to a broker who knows what it’s like to work through debt and create financial freedom, book a free initial consultation with me here. I look forward to being part of your financial journey!