5 Smart And Easy Debt Reduction Tips

2019/02/25

Debt reduction is a process that requires a realistic plan and strong financial discipline. You have to be well committed and consistent with your approach. In fact, you may even have to be ready to practice frugality for a couple of months, especially while you are dealing with mounting, overwhelming debt problems.

Once you get some control over your debts and your finances start getting back on track, you can start living the normal financial life without any policy of compromise. Lifestyle changes also matter a lot, especially regarding your spending habits. Your reformed spending patterns, bigger savings and a solid repayment plan (such as, the debt snowball method) will help you reduce your debts faster and get you closer to achieve a debt-free life. Following is a brief rundown on five very useful tips for debt reduction.

Avoid Impulse Shopping

In order to get things back on the right track, you will have to make sure that you are making the best use of each and every single penny that you earn. Impulse shopping is your worst enemy; so, the first thing you have to do is to develop a strategy to avoid it at all costs. Some good techniques that always work include having a pre-planned purchase list while you are visiting a grocery or department store (and not buying things that are not on the list) and using cash for purchases instead of credit cards.

If you still find yourself highly tempted to purchase something just on impulses, you should at least postpone the purchase for seven to ten days. If that purchase is not necessary and you can afford to live without it, the temptation is very much likely to die soon within a couple of days. In short, when it comes to spending money, your decision must be based on necessity and rationality, not on impulses.

Budgeting Is The Key To Success

The best way to reduce your debts faster is by spending less and saving more so that you can contribute extra sum of money toward debt repayments. Budgeting is a proven way to do just that. So, roll up your sleeves, get a pen and paper or open an Excel spreadsheet on your computer and prepare a budget plan based on your regular necessary monthly expenses and the sum of money you earn every month.

Identify and block all those areas where you are overspending. Your budget plan can be much stronger and more effective if you also implement strategies to improve your income, such as by working overtime, by getting a second job or by doing a part-time freelance job right from your home in your free time, such as, on weekends.

Consolidate High-Rate Debts

You need to pay special attention to extremely high-rate debts, such as the outstanding balances on credit cards and payday loans. These debts grow very fast even if you are making the minimum monthly payment in a timely manner. The best strategy to deal with them is to consolidate them in a way that should convert these multiple high-rate debts into a single low-rate debt account. For example, you can do this by borrowing a low-rate home equity loan or just a personal loan and then paying off all those payday loans and credit card balances with the money thus received.

Pay More Than Just The Minimum Required Payment

The purpose of saving money should not just be to save it for emergencies, but also to use it to reduce your debts much faster. If you continue to make just the minimum payments (as required by the lenders) on your debt accounts, the speed of debt reduction will be very slow, which can be quite stressing and de-motivating for you. Therefore, you are also advised to pay some extra cash toward your debts along with the minimum required payment every month.

Follow The Debt Snowball Method

The debt snowball method is a proven debt reduction strategy, which always works for almost all types of debtors. As per this method, you first have to prioritize your debts in ascending order. The idea is to pay off the debt with the lowest outstanding balance first. But again, you can succeed with this method only when you can afford to contribute some extra money from your savings toward debt repayment. For example, if the balance on the smallest debt is $300, the required minimum monthly payment is $25 and the extra amount of money that you can afford to use is $75, you can wipe off this debt completely within just three months by paying $100 ($25+$75) per month.

You have to continue with the same budget plan even after you have eliminated this first debt account quite successfully, which means the $100 that you were paying toward that debt must now be used to pay off the second debt in the list. For example, if the second debt was $450 initially (before three months) and the minimum payment was $50, the current balance should be $300. Now, you can add $100 extra with the minimum payment and can pay $150 ($100 + $50) per month.

This way, this second debt can be wiped off within the next two months. In this example, you paid off two debt accounts ($750 in total) within just five months. Had you made just the minimum payment during this period, you would have paid only $375 ($50 + $25 per month for five months) and all your debt accounts would have been active. If you continue with this debt snowball method with financial discipline, your overall debt will start reducing at a much faster pace, as the process gets further accelerated with every passing month.

Last, but not the least, working on debt reduction strategies does not mean that you should cut down the fun factor completely from your life. Even if you are practicing frugality, you should still have at least 5% of your regular monthly income for your entertainment. This might not be a big amount of money, but if you do some brainstorming, you will definitely come up with lots of innovative ideas for inexpensive entertainment. Always remember, a life without fun will soon get you de-motivated and you may not be able to continue with your debt reduction plans regardless of how well developed they are.

featured personal-finance

MORE ABOUT 5 Smart And Easy Debt Reduction Tips

Historia amp

1