The best way to increase the rate at which your loans are being repaid is to make a commitment to add a certain amount to your current monthly payment. When you determined your financial weight (earlier on another post) you figured out how much savings you have on hand as well as what your current expenses are.

Then you looked at ways to cut spending. What you save should go to pay down your loans. If you use savings on hand to pay down loan balances, make sure you leave enough in your savings as an emergency fund to cover three to six months of living expenses. This emergency fund can be used if there is a medical emergency, you lose your job, or some other catastrophe happens. You should not adopt a payment strategy by committing to higher monthly loan payments.

Be sure to choose the loans with nondeductible interest to prepay first. Another trick is to vow to yourself that when you receive any unexpected income, such as tax refunds, rebates, and awards, you will immediately use them to reduce your loan balance. One client told me (in Los Angeles) that his tax refunds were the only way he stayed out of debt. He endorsed the refund check directly to MasterCard or Visa because he knew that if he deposited it in his checking account, he would never have the self-discipline to write out a check to the credit card company himself; it was too tempting to spend it all.

If you can’t bear to sign it all over, save a small amount for yourself and use the rest to pay down your debts. A young woman with several thousand dollars of credit card debt was positively beaming when she told me that she had won $1200 on the lottery, saved $20 for herself and quickly sent the $180 to one of her creditors. She also shared a terrific idea on how to avoid being so overwhelmed by your debt load that you just give up trying to whittle it down. She picks $100 of her balance at the time, concentrates on paying that down, and tries to forget about the rest. While $100 may look like a drop in the bucket if your debts total $3000, it makes a real impact on $1000.

You may have noticed that I said to pay down nondeductible loans faster. My California based clients often ask about the advisability of using extra money to pay down their first mortgages, home equity loans, or home equity lines of credit, all of which usually carry tax-deductible interest. In theory, this sounds like a good idea, but I don’t recommend it in practice. Most people need as much liquidity as possible when they reach retirement, and it does not help if they have an expensive, paid-in-full house and not enough cash for their living expenses.

The fact that home mortgage interest is tax deductible makes these loans the last type you should consider prepaying, assuming you’re interest rate is competitive. In earlier posts on California Loan Find you will find ways to make your dollars grow at a rate that should exceed the interest rate on your mortgage (unless you neglected to refinance while interest rates were low).

You always have the flexibility to use investment assets to pay down your home loan balances, but in the meantime you can invest them or use them to meet other goals. By the way, this is also why I usually recommend a client skip a 15 year mortgage and take the longest mortgage possible  – so that they have as much cash and investments on hand as possible for goals such as retirement and education.