If you are living with debt, chances are that it is causing you some stress. Even when you can easily afford your monthly payments, there is the stress that you might not be able to if you ever lost your job and the unpleasant thought that you will spend years paying for a car that is getting older or a piece of furniture that you no longer use anymore. That said, it can often be difficult to figure out exactly how to go about reducing your debt. Which bill should you pay first? How much cash should you have in the bank? Where are you going to find the money to pay the debts down with? Getting started is often the hardest part but with a little bit of organization, you can get a plan in place to start paying down your debt.
Organize your debts.
The first thing you want to do is get a clear idea of how much you owe and to whom. Make a list of all of your total outstanding debts, including the company to whom you owe the money (your creditor), the interest rate on the loan and the amount of your monthly payment. This will help you see how much you owe total, how much of your budget each month is going towards debt repayment and will help you prioritize which debts to tackle first.
Analyze your spending.
Next you’ll want to take a look at your monthly spending so that you can understand where your money is going outside of debt repayment. Include housing, food, utilities, cable, clothing, gas, public transportation and anything else you can think of.
Cut unnecessary expenses.
Now comes the tough part. Unless you have a significant amount of extra cash coming in every month, you’ll need to pare back on some of your expenses in order to make progress on your debt. Since you’ve started looking at what you spend each month, you can now identify areas in which you can cut back. For example, reducing the amount you eat out each month in favor of home-cooked meals may save you $50 while carpooling to work a few times each week could save you $30.
Stash some cash.
Once you’ve identified some extra cash in your budget, you’ll want to make sure that you start putting it to use. First, make sure that you have some extra cash in the bank. This is important because in an emergency, you don’t want to have to resort to using credit cards and incurring more debt – that would be like taking one step forward and two steps back with your debt payoff plan.
Make a plan.
Once you have a sufficient amount of cash in the bank, you can prioritize the debts you want to pay extra against in one of two ways: 1) in order of highest interest rate first or 2) in order of smallest debt first. The first one makes the most sense mathematically because paying it down will reduce the total amount of interest you are paying each month the most quickly. However, some experts, like Dave Ramsey, argue that you will benefit psychologically from getting rid of a small debt and that you can then take the money you were using for that debt each month and put it towards your others. Whichever approach you prefer is fine – the most important thing is that you’re making a point to pay down what you owe.
And don’t be discouraged if your progress seems slow at first. As you stick with it, the amount of interest you’re paying each month will start to get smaller and more of your monthly payments will go towards paying down principal. Slow and steady wins the race!