Debt Reduction - Your Number One Goal

Do you need help with debt reduction? If you’re in debt, it may seem like there’s no way out. The reason most people remain a prisoner to debt is because they don’t have a plan. You can learn how to formulate a plan that will work for you and be on your way to living debt free.

A Plan Is the Answer

The first thing you need to do is gather your statements. From these you can get the basic information such as payoff amounts, monthly payments, interest rates and number of payments left. Check out the section on getting organized for more help with this.

Debt Help

If you’re spreadsheet savvy, it’s extremely helpful to create a spreadsheet that contains this information. This way you can sort and re-arrange it as you like. The Excel budgeting spreadsheet works well for this. If not, you can always write the information on a notepad. The main idea is to have everything in one place so it’s easy to analyze.

The way you choose to move forward with debt reduction can vary. It makes the most sense from a financial standpoint to pay off debts with the highest interest rates first. With these, more of the monthly payments go toward interest and less toward actually knocking the debt down.

However, you may feel better if you can see your debt reduction progress more quickly. If you need that momentum to keep you going, you can choose to pay off the smallest balance first. As long as you stick with your plan, they will all be paid off in the end.

If cash flow is a problem, you may want to attack the bill with the largest monthly payment first. This way, if an emergency comes up, you can deviate from the plan for one month without falling behind on your bills. You’ll simply be a month later paying everything off.

At this point you will find yourself in one of three categories. Your debt reduction plan will vary depending on your situation.

  • You can make your monthly payments but never seem to get any closer to paying off your debts. If you're in debt this is the best scenario to work with.

  • You can’t comfortably make the monthly payments but have not fallen behind yet. If you fall into this category, don’t despair. Check out the section on budgeting to see if you can work with what you have. If not, there are lots of ways to save money and make more money so that you can make it work.

  • You are late on some or all of your payments and need direction as to which way to proceed. If you’re here, you will also find it helpful to read the budgeting page. You may find that by making a few minor adjustments in your spending patterns, you can not only catch up but possibly even get ahead.

To get started, decide which bill you’ll pay off first. Then, make the minimum payment on all your other bills and put any additional funds toward the first one until it’s completely paid off. Next, you’ll use the monthly payment that you would have spent on the first bill and add that amount to the next bill.

    For example, if Bill #1 had a monthly payment of $50 and you’ve just paid it off, you’ll move on to Bill #2. Let’s say Bill #2’s monthly payment is $100. You’ll add the $50 from Bill #1 to the $100 from Bill #2 to total $150 going toward Bill #2 each month. When Bill #2 is paid off, you’ll have $150 each month to add to Bill #3’s monthly payment.
Debt Relief

This goes on until all of your bills are paid. To understand the gravity of this, take a look at your bills list. Add up the monthly payment column. Now imagine having that total amount as disposable income left over each month. That's what you'll have when all your debts are paid.

Things start slowly with this method, but as you can imagine, they really start to pick up speed as your debt reduction accelerates. With each bill that’s paid off, you’ll have more money going toward the next one.

By the time all your debts have been paid, you could easily have an extra thousand dollars per month to start a savings account or invest.

This plan works beautifully if you can currently make your monthly payments and even add a little more each month. However, it still works even if you can’t. You’ll just need to adjust your budget a little more until you can make the numbers work.

The Ugly Side of Debt

Have you ever wondered what the difference is between good and bad debt? Debt is considered good if it covers an appreciating asset like a home or other real estate. Debt for depreciating items like vehicles and unsecured debt is considered bad.

In reality, all debt is bad because until it’s paid, you’re in jeopardy of losing the item that secures the debt or your good credit standing.

A large part of the problem for most people is credit card debt. With credit cards, they can and usually do change the rules at will. They can raise your interest rates or lower your available credit and there’s not much you can do about it. This not only makes paying them off more difficult but it can lower your credit score as well.

Credit card debt elimination should be your first goal. Most other debt is secured through financial institutions such as banks or credit unions and will likely have more favorable terms.

Credit card debt settlement is one avenue. However, this will lower your FICO score as well as damage your credit and is not always the best option. Credit card debt relief can be achieved in other, less damaging ways. One example is credit card consolidation through a home equity loan.

Financial Help

Credit card debt help is also available through a consumer credit counseling service. The most important thing to remember here, it to make sure they’re legitimate and reputable before choosing to work with them.

One final way of debt reduction is through personal bankruptcy. This really should be avoided if at all possible. Sometimes life throws you curves and in a few cases personal bankruptcy may be the only option. However, there are many other avenues that you can take.

Debt reduction should be one of your biggest priorities. Debt will cause stress and hardship if left unchecked. However, if you work hard at achieving the goal of being debt free, the rewards will be well worth it. With little or no debt, your life will be richer in every area.

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