Reducing your mortgage using a cash-based system

While the line of credit is intellectually great, very few people can make it work. A cash-based system works best for most people because it provides near-instant feedback when they overspend.

Let's say you have dinner at a restaurant, and the bill comes to $201. Your limit is $12,000. Have you gone over budget? This is a trick question. The answer is: how can you know?, because there is no budget.

Again, you go to a restaurant, and the bill comes to $201. There is $200 in your bank account. You go to use a check or a debit card. Have you gone over budget? Of course! So firstly, you're going to be more aware of what's actually available to you, and secondly, there is instant and immediate feedback that you've gone over budget.

In the first scenario, you have no way of knowing whether you've cut into your budget. The only way you'll know is 12 months later, when there have been a thousand transactions, and they're all done essentially blindfolded.

In the cash-based system, it's instant. You start off the month with $5,000 and if you spend $5,001 you instantly know about it.

Our financial advisers at Moneytree Partners use a cash hub where all income enters, which acts as a mechanism to put a gap between you and your money. This provides you with one central operation account for all your cash flows and with this you can decide how much to set aside for day-to-day expenses, how much for less frequent, larger expenses and how much for investments, all with instant feedback.

In this operating account, if there's any excess, it can go back into your mortgage. There's instant feedback because at the end of the month if you run out of money, it requires adjusting.

Whether you use this type of system or not, it's important to realise that the way you structure your finances can impact the amount and speed with which you pay down your mortgage. Having feedback mechanisms in place allows you to take control of your spending and finances and allows you to see what is actually happening, and make the changes required if need be.

We've shown you how important it is to have the right structure in place in order to help you reach your financial goals. You may want to consider the benefits of enlisting a financial adviser to help you set up the right structure properly from day one.