Not using cash budgets to plan for reducing home loan

As we have said elsewhere, probably the most common financial problem for clients to solve is their expensive, non-deductible home loan. At some stage of their lives, most people have a home loan and advisers who want to demonstrate their credibility simply must include strategies for repaying this loan as quickly as possible in their SOAs.

One simple way to help is to assist clients complete a cash budget. For an adviser, this should not take long, using things like credit card statements as the ‘source documents’ for amounts being spent on the major items such as bills. This is billable and valuable work and most clients will be happy to pay for it. The idea is easy to introduce, especially if you set out the benefits in the SOA. Something like:

You have a home loan of $300,000 and you are paying 5% interest, or $15,000 a year. This is expensive money: you have to earn $23,700 a year to fund this loan because the 5% after tax interest rate is the same as a 7.9% pre-tax interest rate.

It makes sense to pay your home loan off as quickly as possible. This is step number one in creating your long-term financial plan.

We will prepare a cash budget for you to identify how you can increase your cash receipts, and decrease your cash payments without unduly affecting your preferred lifestyle. The net cash saved should be used to pay off your home loan as quickly as possible.

I aim to identify cash savings of about $4,000 a year, which if used to repay your home loan faster will generate significant long term savings, ie more than $67,000 over the next twenty five years, and create a sound base for your long term financial plan.

You can read more about this and other strategies here: Dover’s non-deductible debt management materials. Please take the time to read these materials as even a small goal kicked for a client with regards to debt management expands out to large gains as things compound over time. Most advisers find that the strategies here more than pay for themselves over time.

The Dover Group