Or maybe you came across this post because you know someone that’s got themselves a little above the neck line with debt and they don’t know how to climb out of the mess.
Either way you’re in the right place because you’re about to learn a quick and easy way to pay of debt by spreading the pressure of payments.
There are a number of proven methods that people can take in order to pay off debt. This post on ‘The Half Payment Method’ is one in a series of posts on how you can pay down your debt as quickly as possible.
If you want to read about the other methods in this series that can help you tackle paying off debt fast consist of:
Paying down debt with The Half Payment Method
This first method in this series explains The Half Payment Method and, to the best of my knowledge, was coined by fellow finance blogger The Budget Mama who managed to successfully pull her family out of a financial hole and pay off debt using this simple technique.
The principle really comes down to manipulating yourself using psychology and the method hinges off the advantage of a setting up a cash flow system.
It works best if you get paid on a weekly or fortnightly basis and pay monthly bills like credit cards, mortgage or loans.
That’s not to say it’s not a good method for paying down debt on differing periods, it just isn’t as effective if you get paid monthly and you face monthly bills.
However, I’m a big believer that if you get paid monthly you should also break down your family budget to weekly amounts, splitting your income in order to ration yourself throughout the month.
So how does The Half Payment Method work?
Let’s assume you get paid fortnightly and each fortnight you get $2000 in your bank account. Each month you have to pay off your mortgage, which costs you $2000 a month.
The half payment method dictates that you should pay half of the mortgage payment into an account with the first pay packet, with the second half being paid when the bill is due on the second fortnight. So here’s how your month would look:
Payday 1: $2000
Half payment to mortgage: $1000
Money left from first pay packet: $1000
Payday 2: $2000
Half payment to mortgage: $1000
Money left from second pay packet: $1000
This is really just sensible cash flow right?
What you are effectively doing is absorbing the shock over both pay packets so that you have enough money available for other expenses or repayments at the end of each pay day.
The benefit to this can be seen by looking at the alternative situation in the following example. If you pay off debt from your pay packet at the time that the debt is due your cash flow suffers. Take a look:
Payday 1: $2000
Payment to mortgage: $0
Money left from first pay packet: $2000
Payday 2: $2000
Payment to mortgage: $2000
Money left from second pay packet: $0
Do you see? There’s nothing left in your account after the second pay packet!
That’s not a sensible way to run your finances. I know, I’ve been there.
From time to time emergencies or unexpected expenses crop up and having better cash flow will help you deal with those situations when they hit you. The last thing you need, particularly if you have children, is to be hanging out for a fortnight or a month until the next pay packet!
There’s nothing worse than living pay packet to pay packet, waiting those last few days with no money. The Half Payment Method aims to help you avoid this by balancing out your payments whilst enabling you to pay off debt.
You could potential argue that you still have $2000 left at the end of the month and that money is available to you after the first pay day – notwithstanding the fact you’ll have other expenses. But that requires you to be diligent with that $2000, and let’s be honest with each other, it’s too easy for that kind of money to dry up if you can’t be sensible!
In fact, you could be the most sensible person in the world when the money is available to you, but chances are it’ll get absorbed by something and, if that happens in the first fortnight, you’re going to have a very sobering time after your second pay packet.
How many of us enjoy those dry weeks when your pay packet runs out? It’s agony right?
If you opt to go down the Half Payment Method, and you use the money for the first half of the mortgage payment, what do you do with that payment?
The idea is to put the money to one side rather than paying off the bill.
If you’re going to do that I recommend you set up a savings account that allows you to withdraw your money when it’s needed. Set up your automatic payments to come out of that account. By doing this you’ll be earning a little more interest than a standard cash account and whilst it will only be a small amount in your pocket at the end of the month it’s still money in your pocket.
My grandfather used to say to my Mum:
Look after the pennies and the pounds will look after themselves.
Now, if paying off half your mortgage payment a fortnight early gives you some benefit by reducing the interest payments (albeit slightly) then DO IT!
Pay it straight off.
Your mortgage interest, or saving on loan interest if that’s the expense you are paying down, is going to save you more than you can earn in any savings account.
Some loan agreements either don’t allow you to make early repayments or don’t save you any money if you do. If that’s the case you’re better earning a little interest via a savings account.
If you are paying off a credit card then most banks charge you interest at a daily rate on the balance that is due overnight, so it makes absolute sense to pay off debt for credit cards using this method and making those payments as early as possible. More to the point, with credit cards, chances are you’re being charged a stupid amount of interest so paying down these as quickly as you can is going to save you a lot.
Give it a shot and let me know how you get on.
The Budget Mama recommends to start using The Half Payment Method with smaller payments first in order to get into the habit but honestly, I think you’ll see the benefit to this method if you jump in with both feet.
It will take a bit of discipline not to raid that savings account, but you can do it!
If you find yourself bereft of the discipline to not use that savings account, perhaps talk to the bank about ways you can prevent withdrawals with the exception of the automatic payments that get set up on it, then you have no choice, once the money is paid into that savings account it’s effectively gone!
If you’re already using the Half Payment Method how do you find it, has it helped you pay off a large amount of debt and did it ease the pressure? Let me know in the comments.