How to Decrease Debt
The two keys to debt reduction are budgeting and self-control. It took you a long time to get into debt, and it may take just as long to get out of it. However, it is worth it in the long run. Many borrowers are completely unaware of how much debt they actually have until they sit down and list it all out. First, create a budget. The hard work in decreasing debt comes after that initial jump into the process.
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Things You'll Need
- Credit card bills
- Mortgage statements
- All other loan statements
- Receipts from recent purchases
- Checking account statement
- Budget
- Calculator (optional)
Instructions
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Write down all monthly expenses and income. Use this as a basis for creating your budget. Create columns of your spending categories such as housing, automobile, dining out and entertainment. Place each expense, no matter how small, into the appropriate category.
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Analyze your budget. Look for ways to reduce and eliminate certain categories. Avoid or reduce eating out and using snack machines at work. Use coupons and shop the weekly sales at the grocery store. Limit grocery spending by eating what you already have in your kitchen. Switch service providers for utilities to save money. Bundle cable, Internet, and phone services to save money, too. Eliminate extra services on your cable and cell phone bills. Create a goal to eliminate any unnecessary spending for a set time period, such as 30 days, and then lengthen the goal once it is accomplished. Look into cost reduction plans for each category.
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Attempt to earn as much extra money as possible. Sell off unused items online or through a garage sale. Take on extra shifts at work or get a second job to increase your income.
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Rank each debt from smallest monthly payment to the largest monthly payment. Use any extra money earned or allocated to debt repayment in your budgeting process to begin to knock down the smallest monthly payment debt. Once that debt is paid in full, use all the funds previously applied to it each month to tackle the next smallest debt. Continue to "snowball" your payments until a large monthly payment is being applied toward the largest monthly payment debt. This is known as debt snowballing, a plan made famous by financial adviser Dave Ramsey.
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Tips & Warnings
If most of your debt is credit card debt, call your credit card companies and ask for a reduced interest rate, if you have paid the debt on time for a full year. This decrease in interest rate should reduce your interest expense in the long run.
Avoid debt reduction or elimination plans. Most will cost you money and have a negative impact on your credit score. Remember the adage, "if it sounds too good to be true, it probably is." The only way to get out of debt and not hurt your credit is to simply pay it off.
Despite your best intentions, you will have months where unexpected expenses arise or you simply "fall off the wagon" and do not pay down your debt. Start the plan over, and learn from your mistakes.
References
- Photo Credit budget, payment allocation image by Kalani from Fotolia.com
