Managing Debt: Six Steps to Reducing Debt
Eileen St. Pierre, The Everyday Financial Planner
While money can’t buy happiness, getting rid of debt can bring tidings of joy and peace. Make 2014 the year you finally get back on track. Follow these six steps to reduce your debt and cross this resolution off your list.
Step 1 – Gather Records
Gather up all your financial records, including credit card statements, payroll deposits, ATM slips, and utility bills. Sometimes just the act of getting organization can reveal patterns in your financial behavior that you never knew existed. Need some help? Visit my Let’s Get Organized! column.
Step 2 – Identify Spending
Write down everything you spend money on every day for at least month. Have an extra calendar from Christmas? Make it your budgeting calendar. Seeing all your entries side-by-side can be a real eye-opener.
Step 3 – Prioritize Your Budget
Make a chronological list of all your bills. List creditors, balances, and the interest rates you are paying. Which debts should you pay off first?
- Start with a goal you know you can accomplish. Pay off the debt with the lowest balance first (this goes against what many experts tell you to do). This can build the confidence you need to tackle the rest of your debts.
- Tackle one debt at a time, paying the monthly minimum on the other debts.
There will be some “must pay” items in your budget. After that, select the items you value in your monthly spending such as church tithing, children’s allowances, movie downloads, and dinners out.
- List these items in order of importance to you.
- Assign each item an allocated dollar amount.
Make your budget a priority and track your expenses.
Step 4 – Spend Within Your Means
Take the lowest priority items off your budget entirely. You may realize that you can live without Netflix.
- Spend less whenever you can.
- Use your tax refund to pay down debt.
- Sell what you don’t need.
- Negotiate with your creditors to lower the interest rates on your debt.
Step 5 – Pay Yourself Like a Bill
Make sure your budget contains a line for savings. Start small and increase it as you pay down your debt and get a better handle on your expenses. Make sure the money is automatically transferred to your savings account each month or pay period – this is important!
Step 6 – Adjust for Change
Your income may change over time. If you get a raise or bonus, decide how much you should save and how much you should use to pay down debt. For additional help on developing a personalized, self-directed debt elimination plan, go to PowerPay.org. PowerPay was developed by Utah State University Extension and is free. You just need to register to use it.
The final column in the Managing Debt series will discuss how to choose a credit counselor. Visit my Debt Management page for more information.