For many Americans, debt is a serious problem. If you are paying on debt every month but are not seeing a debt reduction, it is time to develop a debt reduction plan.
Your first step is to stop using your credit cards. Do not be tempted to purchase anything that you cannot pay for in cash. Cutting up your credit cards is one sure way to stop using them! If that is too drastic, put them in a container and fill the container with water. Now put the container in the freezer. You still have your credit card in case of emergencies, but now it is not convenient to use for your daily purchases.
Your second step is to develop a budget. If you have never made a budget before, it can be difficult to assess how much money you spend and where. It’s ok if your first budget isn’t perfect. In fact, it will probably take three or four budgets before what is on paper matches your real spending habits.
Your budget does not need to be fancy. You can keep your budget on paper or on a spreadsheet. Free spreadsheet software is available online if you do not own any. If you are tempted to go and buy the newest money software on the market, reconsider this purchase until you have your debt under control. Programs that help you budget can save you time, but if debt is a serious issue you will want to take advantage of free resources before spending any more money.
Start your budget with writing down your income and then all your bills: mortgage or rent, electricity, car insurance, phone bills, and other monthly expenses. If it varies from month to month, use your best guess and remember it is better to set aside too much money for a bill rather than not having enough. After bills, budget for groceries. Finally, budget for the nonessentials.
Now that you have a budget, it is time to start tracking your spending habits. Write down everything you buy, from gas for your car to the bottle of water you grabbed at the convenience store. It is important to know where all your money is going. When we do not track our money, it seems to disappear magically. How many times have you reached the end of the month with little cash but feel you haven’t purchased anything to show for it. Tracking your expenses will eliminate this problem.
Now return to step two to refine your budget. After tracking your expenses for a month or two, you will be able to see where your money actually goes. Adjust your budget or your spending habits so that the two are in sync.
The fourth and final step is to decide which debt reduction plan you are more comfortable with and apply it to your life. There are two schools of debt reduction, both of which have their benefits.
You can reduce debt with math. In this method, you pay the minimum payment on all your credit cards and loans except for the one that has the highest interest. Budget as much money as you can to the credit card with the highest interest, whether you owe $42 or $14,000. If you do this, you will be saving the most amount of money by eliminating the most interest. When you have paid off your first high interest loan, attack the one with the next highest interest and continue with this process until you are debt free.
While doing it with math assures you of the fastest payoff if you stick with it, a lot of people become discouraged by the lengthy process and are unable to complete it. If this describes you, you can reduce debt with a debt snowball.
With a debt snowball, you attack the smallest debt first, regardless of the interest rate. List loans from least amount owed to greatest amount owed. Pay the minimum on all loans except for the smallest one. Pay as much extra on that as possible. When that loan is paid off, move on to the next one. When you get to your second debt, pay the minimum that you were paying plus whatever you were paying on the first debt.
The debt snowball method is a great way to keep motivated about paying off your debts, because you will see results more quickly than if you are using the math method. If you have a hard time getting motivated about paying off your debts, give this method a try.
Whatever method you choose, stick with the program and you will see results. Although debt can be overwhelming, know that you are in charge of your life and you can join the ranks of people who have reduced and eliminated the debt in their lives.