Do you find yourself in thousands of dollars of debt? The challenged of reducing your debt can seem insurmountable. However, it is possible to reduce your debt, with a little planning and dedication.
Here are the 5 steps in how to reduce your debt:
- The first step is to evaluate your debts
Do you know where you stand in terms of debt?
This is important to know before you start reducing your debt because the amount of debt and the type of debt you have will impact the options available to you. You can do this by collecting all your financial documents and printing out your annual credit reports.
Organize your debt by writing down the balance, interest rate, and monthly amount due for each of your debts. You need to make sure you include your credit cards, auto loans, personal loans, and other debts.
- The second step is to look at your budget
Now that you know where you stand in terms of debt, the second step is to take a look at your monthly budget. You should write down your monthly income after taxes and subtract your bills such as rent or mortgage payment, as well as other monthly expenses such as utilities, groceries, and insurance.
Once you have subtracted all your expenses from your monthly income, you need to calculate how much you have left to pay off your debts. Do you have a little left or a lot left at the end of the month after all your expenses? If you have a little amount left, find ways to reduce your spending. Cut back on certain things you do not need so you can pay more towards your debts each month.
- The third step is to make a plan
It is time to create a plan for reducing your debts. You will need to subtract your monthly expenses and your minimum debt payments from your monthly income after taxes. The remaining amount you have left should be used to pay off your debt with the highest balance and interest rate.
Consider adding debt consolidation to your plan. Consolidating all of your high interest debt into one low interest debt can save you hundreds if not thousands of dollars a year in interest charges.
You should avoid adding new charges to your credit cards that will increase your debt. You also need to find a way to increase the amount you pay towards your debt each month.
- The fourth step is to start negotiations
You should contact your lenders and creditors to see if you can change the terms on your debts. You can probably negotiate to lower your interest rates or a reduced settlement on some debts.
In this step, you can also look into moving your credit card debts to new accounts with lower interest rates. For example, moving a debt balance to a credit card with 0% rate can help you save a lot of interest.
- The fifth step is to follow through on your plan
It is important to follow through on your debt reduction plan. You need to find a way to meet your repayment goals each month. Stay consistent and put as much as possible towards your debts because before you know it you will be debt free.