If you really want to reduce your debt, the first thing you must do is create a spending plan and stick to it. Your plan needs to focus on paying down debt, not adding to it. Make a goal to be out of debt in six months, a year, two, or whatever it takes. Write it down. You need to stick to this plan until you achieve your goal.
- First identify, prioritize, and price your essential expenses.
- Then make a list of all your take-home income.
- Determine how much you have left over to pay toward debt.
How to Start
Identify and prioritize essential expenses. Limit your spending to the bare essentials: food, shelter, utilities, etc. Make a list of essential expenses and how much they cost each month (do not include debt payments other than mortgage). If you can reduce some monthly expenses, do it.
Ways to Reduce Monthly Expenses
- Turn lights off in rooms when no one is in them.
- Cook more instead of eating out.
- Use coupons.
- Avoid sales on items you don’t need.
- Use public transportation.
- Refinance or consolidate loans.
- Cancel unnecessary subscriptions, like cable, magazines, newspapers, etc.
You can find many ways to save pennies a day, which add up to dollars you can use to reduce your debt. Once you make your list of essential expenses, avoid buying anything that is not on the list until you reduce your minimum debt payments to below 15% of take-home pay.
Take Note of Your Income
Make a list of all your take-home income. This is what you have available to pay your debts and essential expenses.
Now deduct your monthly debt payments (except your mortgage) from your income. This is what you have left to pay essential expenses. Here is where many people get into trouble. If you find that you do not have enough to pay debts and expenses, you will need to take additional action. Some people simply start juggling debt payments by making minimum credit card payments or paying one bill this month and another the next. This is a bad move.
Learn to Save By Reduction
Look at those expenses again. Reduce where you can. When you get to the point where you simply cannot cut expenses any further, you have one of two choices: earn more income or lower your monthly debt payments. Earning more income may include a side job or having a non-working spouse take a job. Reducing your monthly debt payments is a little trickier. Refinancing is a great way to lower your monthly loan payment.