Reducing Personal Debt

Personal debt reduction strategies

The first thing to do to reduce debt is stop spending money you do not have. When you find yourself in a hole, the first thing is to quit digging. If you cannot get your spending under control, you are sunk. There is no strategy that has the slightest chance of success if you do not get a firm grip on spending.

You need a clear understanding of your income and your expenses, and both amounts need to be as precise and detailed as you can manage. Once you have a clear of where your money comes from and where it goes, you are ready to reduce the outflow so it does not exceed the income.

So you have cut those $5 lattes from five a week to two, you have consolidated trips to run errands so your transportation expenses are down, and you have reduced other spending to the point where you are no longer spending more than you make. Once you have done that, it is time to work on reducing existing debt.

Some debts you cannot reduce significantly in any meaningful amount of time. House payments and car payments continue as they are. Most of our discretionary debt is linked to credit cards. If you purchased furniture or appliances on an installment plan, that is similar to a credit card account. However, with that kind of purchase, they sometimes write the contract so there is no benefit for you in early repayment.

There have been a lot of strategies proposed for a regular process to reduce credit card debt. Some say focus on the account with the biggest balance. Some tell you to pay the most on the one with the highest interest rate. Others say to pay down the one on which you are charged the most interest, in dollars, without regard to the rate or the amount of the balance. All of these will work, eventually. But they all have one big problem and that is it takes a long time to see any results.

List all of your credit accounts according to the balance owed, from highest to lowest. Then pay a little over the minimum (never pay just the minimum: you doom yourself to eternal debt that way) for all the accounts except the one with the lowest balance. Pay that one in full. If you cannot manage to pay it off, pay as much as you can and pay it off next month. Put that card away and do not use it at all.

The next month you have one less payment to make. Start paying off the lowest balance remaining. The advantage to this method is you can see results right away. You will make visible progress, which will encourage you to continue. There are two keys to making this work. First, you must stop spending money you do not have. Second, while you are paying off the card with the lowest balance, you must not use that card for anything. After it is paid off, take it out of your wallet and put it away.

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