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Using a Line of Credit Efficiently
When you have an income stream or in fact several income streams, such as salary and wages or rental incomes and you have established a Line of Credit, the most efficient way to conduct your personal affairs is to have all of your streams of income deposited directly into your Line of Credit. This will immediately reduce the balance of your loan and as a result, reduce the interest being accrued, as the loan is calculated daily on the balance outstanding. For example: If you are paid $5,000 dollars salary per month and you have this salary deposited directly into your Line of Credit each month and your interest rate was 7.5%, your interest saving would be approximately $30 for the month.
Now that may not seem like a great saving, but when you do the same thing every month it begins to compound very quickly helping you to pay off the personal or non-deductible portion of your loan very quickly. You may say that’s all very well, but how do I keep my $5,000 salary in the Line of Credit for the entire month as I need that money to pay for living expenses. Well, the first step is to get yourself set up with a 55 day interest-free credit card and put all of your monthly expenses on the card so that you can afford all your normal monthly expenses throughout the month and keep your cash working for you in your loan account.
At the end of the credit card cycle you set up an automatic direct debit from your Line of Credit account to pay off the outstanding monthly balance of your credit card. This process takes a little bit of setting up and a lot of discipline but it can be very effective when done properly. Take this process one step further! If you are self-employed and running a business most of you will have separate accounts set up to collect GST or superannuation contributions which are usually then sent off to the respective government and private organisations every three months.
If these amounts were collected and ‘stored’, in your Line of Credit account until they needed to be paid, you will quickly notice a substantial saving in interest and your outstanding balance will start to reduce considerably faster. Additionally, money is collected from sales or services of your business and can also be temporarily placed in your Line of Credit account during the month and then moved back to your business account at the end of the month to pay your monthly bills and credits.
This style of operation can get a little bit messy and the flow of money needs to be accurately accounted for with good bookkeeping. However, if set up correctly and accounted for correctly, this simple process can have a massive impact on reducing debts.