Creating a Debt Management Plan That Actually Works

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 add up your essential expenses. These include housing costs, groceries, medical expenses, and utilities.
• Calculate your take-home income.
• Use these two figures to determine where you may have a little extra cash to pay down debt.

How to Start

Identify and prioritize essential expenses. When trying to reduce debt, it’s vital to limit your spending to the 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 at home instead of eating out.
• Use coupons for items you know you need.
• Don’t let sales tempt you to buy items you don’t need.
• Use public transportation when you can.
• 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.

Calculate Your Take-Home 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.

If you have more expenses each month than you have the cash to cover them, you either need to cut expenses or increase your income. If you’ve reduced expenses as much as possible but still don’t have enough cash each month, consider increasing income temporarily by getting a second part-time job or starting a “side hustle” (think freelancing, selling your unused items online, or driving for a ride-share or delivery service).

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, but refinancing your auto loan or mortgage can help.

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