So you want to know how you can reduce debt.
Paying off debt is a good thing to do, and living without debt gives you a freedom that most people don’t even dare to dream of. You might say that it can’t be done, that you have too much debt. Having too much debt suck, I know that first hand. But you have to start somewhere, and you have to start where you are now. Below is a proven plan that works, and it will work in your situation.
The steps on how to reduce debt:
Change your way of thinking.
It’s easy to give up and live in a state of mind where you say to yourself that this is hopeless. Change always starts with yourself first. Start telling yourself that this situation is only temporary. Don’t say it can’t be done, say: how can it be done?
Get an overview of you situation and finances.
Make an account of your income and expenses. How much money do you make each month and how much money do you spend. Include every income and every expense you know of and be honest with yourself. This is the most important step of all steps as it’s critical to have a good overview of your current situation. At the bottom, you will see your months total cashflow (total income – total expense). Chances are your cashflow might be negative but don’t give up, this is only temporary.
My friend Dave Ramsey came up with this plan, and many people are now living a life of financial freedom, free of debt. All thanks to this plan.
Build up emergency fund.
Your first goal is to get an account with $1000 for emergencies. We call it emergency funds and they are for emergencies only. You are only allowed to touch it when there is a real legitimate emergency. Everything that can be planned for is not an emergency; your wife’s birthday or Christmas is always at the same date. This account will make you sleep well at night as you know that if your refrigerator breaks down or something happens to your car, you have money to pay for it. This account is for emergencies like that, and only such emergencies. Be disciplined on this.
For some people, this step is easy as you already have more than $1000 in savings. Simply move $1000 into this account and you are done. For others, it is much harder as you might not have a single dollar left.
This is the time to take action, reduce your expenses as much as you can. Winners make sacrifices to reach their goal. You can make sacrifices too: stop eating out, reduce your expenses. Eat rice for dinner if you have to. Take an extra job delivering pizzas, do whatever it takes to reduce your expenses and increase your income. I didn’t say it would be easy, but I said that it can be done.
Start rolling the debt snowball.
List all your loans ordered by smallest to largest and pay minimum on all loans except the smallest one. Use all your excess money to pay extra on this loan until it is paid off. Once it’s paid off, take the extra money from it and add it to your payment on the second smallest (which is now the smallest one). Your debt snowball is getting bigger and bigger until there are no loans left to pay.
Don’t order by highest interest even if it sounds better mathematically. Mathematics, real life and your discipline and perseverance doesn’t always work together over an extended period of time.
This plan is very easy on paper, and it’s been proven many times. Take a look at Dave Ramsey’s website for many testimonials and listen to his daily radio show for more inspiration and motivation.
Artice written by Anders Rodland.
