Personal Debt Reduction Strategies

Many have fallen into the temptation to spend beyond their means by using easily available credit. Credit cards are one of the culprits that allow you to enter into major debt with barely a thought. As debts increase, a major part of future income becomes devoted to paying off debt and the accompanying interest. The effects can be crippling. 

Getting out of debt requires sacrifice and dedication. Clearing debt leads to greater prosperity, dramatically reducing the level of household stress.  Reducing or better still eliminating debt is a strategy well worth pursuing. 

Debt consolidation is a facility offered by a number of banks and financial institutions. Debt consolidation involves placing all the debt into a single loan. Smaller debts may be combined into a vehicle such as a home loan to be repaid over a longer period. 

Consolidating your debt into a single loan can help to ease the situation. There is now only one repayment to worry about. If the interest rate in the consolidated account is lower than the rates of interest that you have been charged, then consolidation will help. But debt consolidation does not get rid of your debt. It transforms short term debt into long term debt. While it may ease the situation, you will still be paying for many years to come and there is little chance of reducing the repayment. 

A debt elimination plan is a better option. This method will help you to become debt free in a reasonable time frame and the benefits will be felt fairly quickly.

Step 1

List all your debts. The debts include everything that you owe, including home and car loans, credit card debt, purchase agreements and arrears. For each debt, list the capital amount owing, the current repayment, the rate of interest being charged and the remaining term. Total the repayments, the capital amounts owing and how much you are paying in interest. Knowledge is always the first step towards solving the problem.

When you add up the current payments you will understand why the debt presents such a major problem. 

Step two

Make a comprehensive list of everything that you spend and pay out every month. It is important that you include everything. Now it is necessary to create a surplus from this budget that will be used towards eliminating debt.  

Step three

Review every purchase carefully and ask if you really need it. Remember that small sacrifices now can lead to greater affluence later. Get rid of luxuries. What can you eliminate from your spending that won’t have much impact on your lifestyle? If the budget is already very tight, you may have to make some short term arrangements with some of your creditors. Perhaps you can pay interest only on the home loan for the time being. 

Step four

Select the debt with the shortest term. For example, If you have debts that have remaining terms of six months, fourteen months, two years, eight years and fifteen years you will target the six month debt first. All of the surplus that you have created in your budget must be paid towards this debt. 

The result is that the shortest debt is paid more quickly. In this example, the six month debt has been paid in three months. Now take the surplus and the total repayment of the six month debt and add that payment to the fourteen month debt. When that has been paid, you can do the same with the longer debts as well. 

If you apply this step consistently your debts will be paid in a fraction of the original term and you can start living debt free. The difference is amazing. The approach can be applied to any type of debt, but check the contracts first to make sure that you will not be charged interest for the full term regardless. If the finance house has roped you into a contract where early repayment does not save you anything, then put the surplus into an investment. 

You may vary this plan as you wish. You may reward yourself each time a debt is repaid. You may decide that you do not need to be as aggressive when dealing with the home loan. But remember that using this method, it is quite simple to repay a twenty year mortgage in five.