Personal Debt Reduction Strategies

Debt has become equivalent to a four-letter word. Paying off debt frees up income to invest and save, reduces stress and aids you in becoming financially independent. Yet paying off the minimum on your credit cards each month isn’t going to get you where you need to be. Reducing debt takes research, planning and strategic implementation.

-Create a budget

Account for your monthly income and expenses. Subtract the total amount of expenses from your income, and evaluate what you have left over.  This is considered your disposable income.

-Cut out things that are not necessities

Cable (for instance) is not a necessity. Consider cutting down on variable expenses like gas, groceries, and entertainment. When paying off debt, it’s important to evaluate what you need and what you don’t, and use that saved income toward a debt repayment strategy.  Be honest with yourself. Chances are, there are multiple areas of your financial world that can be cut down and cut back. This increases your disposable income and income that can be applied to paying off debt.

If you have items you can sell, it’s important to do so as quickly as possible. Consider things you own but never use. Perhaps it’s that treadmill that you hang clothes on, or a car that sits in the driveway, maybe a motorcycle or a collection of movies or household items. Whatever it is, declutter and streamline your life. Put your earnings and any monthly disposable income in a high yield savings account and use this account to begin paying extra on your debts each month. The beauty of this strategy is that you will start to reap the benefits of earning interest on your money, while reducing your debt. This helps reinforce the principals of financial independence.

-Write down a list of your debts

Write down a list of all of your debts. You can do this with pen and paper, a spreadsheet or any number of financial planning advice software. Include the minimum monthly payment, the balance and the interest rate.

-Total up all of your debt

If a budget isn’t enough of a wake up call about the current state of your finances, a list of debts will most likely be the catalyst that helps you realize the true state of your money. Take a look at all of the money you are throwing away on interest, and consider what you could be earning on that money if it was being put into investments and savings.

-Pay off the credit cards and loans with the highest interest rates first

This is a common sense approach to debt reduction. Using your list of debts, begin paying off the credit cards or loans that carry the highest rate of interest.

Write in an allotted amount for this loan into your budget each month. Pay the minimum balance on your other cards while concentrating your focus on that high rate card until the balance hits zero. Rinse and repeat this strategy with subsequent cards and loans from the highest interest rate to the lowest interest rate. This is the best way to be debt free now and for many years to come. Think of it like a disease: cut the worst parts out first.

-Quit using your credit cards for normal monthly expenses

It doesn’t matter how quickly you pay off debt or how well you pay off debt if you continue to use your credit cards. If you do use credit cards, pay off the balance each month. Consider credit cards as an emergency last resort, and nothing more. Consider only keeping one major credit card, lessening the temptation to fall back into a self-destructive cycle of debt.