How to Reduce Household Debt

Trimming debt is on the minds of many people today. Fortunately, there are several basic steps to take that can help make the household more efficient and make it possible to lower debt. In time, the household can become debt free, if care is taken to keep the eye on the goal and not be distracted by non-essentials.

Things You'll Need

• Computer
• Budget software
• Budget
• Debt reduction plan

Instructions

1. Get a handle on your current financial status. This will mean determining your average monthly income and identifying your usual monthly expenses. Include everything from purchasing a snack out of a vending machine at work to all your usual utilities. Knowing how much is coming in and how much is going out is your first step to financial freedom.

2. Realize you will have to make changes in order to get out of debt. This will mean cultivating a mindset where you do not allow yourself to feel deprived because you cannot purchase a luxury item or go out for the evening when you want. Decide that you will find other pursuits that do not interfere with getting out of debt and learn to enjoy them.

3. Set up an operating budget for the home. Your budget will include a category for each necessary monthly expense. Necessary expenses include food, rental or mortgage payment, utilities, auto payments, minimum credit card payments or any monthly obligation that is fixed. At this point, do not include unnecessary expenses such as meals out or nightlife. The idea is to make sure your net income will cover the essentials before budgeting in any extras.

4. Identify your surplus. For purposes of getting out of debt, surplus is the amount of net income that remains after the essentials are covered. Your surplus will serve as your tool to begin chipping away at your indebtedness.

5. Save a portion of your surplus. One mistake many people make when trying to get out of debt is they devote any spare income to the task. By choosing to set aside a percentage of the surplus into an interest bearing savings account, you begin to build up an asset even as you lower your debt. Your savings can be drawn upon in the case of unexpected expenses.

6. Allocate your remaining surplus to paying off debts. For example, choose one credit card and direct a portion of your surplus to paying off the balance. As one debt is paid off and is removed from the basic budget, your surplus increases and can be applied to the next debt in the chain. Continue to pay minimum monthly amounts on all other debts, so you stay current.

7. Use software to track your progress. Many budget software programs can help you to see how your financial condition fares from one month to the next. Seeing your overall amount of debt decrease a little each month can be a powerful motivator to keep moving forward.

Tips & Warnings

• If you happen to slip one month and do not follow the budget, don’t waste time browbeating yourself. Identify how the slip happened, determine to not repeat the mistake, and move forward. You can’t change the past, but you can decide how the future will go.

• Getting out of debt is a process that is rarely accomplished overnight. Be prepared for periods where you feel your progress is too slow or that you will never get out of debt. Counterproductive thinking of this nature will only serve to undermine your efforts and cause you to fail.