Individuals who are currently in debt often implement numerous measures to try and reduce the amount they owe. Some hire debt counselors or pay money to consolidation agencies for assistance with reducing debt. However, what they do not know is that they can reduce their debts without any third-party assistance. All they must do is implement the instructions that are explained in detail in the sections below.
Step 1: Evaluate Debts First
In order to evaluate the sum of your debt, you need to collect the necessary financial documents and your credit report. That will help you to evaluate your financial condition and to realize what kind of situation you are in. Sit down and write out all the information relevant to your debt, including the interest rates, balances and monthly amounts. While calculating these elements, you must not forget the various types of loans (personal, auto, payday), credit cards (and their annual fees) and other debts you may have. You may exclude student and mortgage loans from this calculation, and focus on paying off your main debts first.
Step 2: Monitor Your Budget at All Times
In addition to knowing the amount of money you owe, you should also keep track of your monthly income when preparing and collecting all the necessary pieces of information that will help you resolve your financial situation.
Calculate your monthly income by subtracting all your expenses, such as:
- Rent or mortgage payments
- Student loan payments
- Childcare expenses
After you subtract these expenses, the remainder of your funds can be used for reducing your debt. Be careful if your monthly income amount is too small though, as this may indicate that you need to lower your monthly spending. The lower your monthly expenses are, the more money you will have to reduce or pay off your debts.
Step 3: Create a Plan for Reducing Debts
Once you get familiar with your financial situation, you need to continue by creating a plan for reducing your debts. After you have subtracted the monthly expenses and debt payments from your monthly income (without taxes), you will be left with a small amount that may be used for paying off your debt. If you dedicate these funds to your debt every month, you will eventually be able to eradicate your entire debt.
Also, if you can limit your monthly expenses and increase the amount that you dedicate to your monthly debt payment, you can then pay off your debt at an even faster rate.
Step 4: Initiate Negotiations
As soon as you begin with your plan for reducing debt, you may qualify for better terms with your creditors. Therefore, it is highly recommended that you contact your creditors and lenders to begin negotiation for lower interest rates. By dismissing old debts, your creditors may allow you to move some of your current debts to new accounts whose interest rates will be lower than they were previously.
If you decide to move debts and balances to save on interest, you must think of your credit score. Remember to maintain a good credit score by keeping your credit card balance below 35 percent of the limit.
Step 5: Implement the Debt Reduction Plan
After reading the pieces of advice mentioned above, you may finally begin implementing each of the steps. It does not matter if the amount of money that you pay differs from month to month. The only important factor is that you try to pay off as much debt as you can on a monthly basis. To do so, you are advised to keep a chart or to have a reminder of the progress you make daily. By following this method, you can pay off your debts quickly and efficiently and proceed to living your life free of debt.