I don’t know about you, but I really hate owing anyone. I know that it’s inevitable (unless you’re independently wealthy). Somewhere along the line you have to incur some form of debt. Most of us don’t have cash sitting around to buy a house outright. And other times it might just be that we get caught up in the excitement of shopping so when the person at checkout asks you about their store credit card (and mentions the discount), you end up saying yes. Not saying that’s ever happened to me (ok…more than once). Just saying it could happen.
Then one day you start analyzing your monthly bills, realize that you’re paying an arm and a leg in interest rates, and decide to do something about it. Getting started seems overwhelming. How do you organize, prioritize, and pay the debt down? Whose method works best? There are so many articles out there on reducing debt. I have done a ton of research. Hopefully the next few steps will save you from that scary moment at the very beginning.
- Create a budget. The very first thing to figure out is your monthly budget. Set aside a few minutes to create a list of every bill you pay, the minimum amount due, the total balance, the date due, and the interest rate (if applicable). This can be a simple list. Nothing over the top or crazy. A simple excel sheet with columns will work. See the table below as an example:
|Name of Creditor||Minimum Due||Total Balance||Due Date||Interest Rate|
|Mortgage||$xxxx||$xxxxxx||1st of month||4.5%|
|Cell Phone Bill||$xx||Same||15th of month||n/a|
|Gas Bill||$xx||Same||10th of month||n/a|
|Power Bill||$xx||Same||10th of month||n/a|
|Credit Card 1||$xxxx||$xxxxx||5th of month||10.9%|
|Credit Card 2||$xxxx||$xxxxx||26th of month||21.5%|
Next, create a list of all of your expenses over the last month. Again, keep this simple. The point is to try to figure out where you are currently. You can make adjustments later. Now is the time to honestly state ALL of your expenses, no matter how small. You can pull your credit card statement, bank statement, etc. for the last month to create this list. Just make sure you list every expense. A very short example list is below:
|Restaurant A||$xxx||Eating Out|
Now that you have your list of bills and expenses, add the totals together. Compare this number with your income. Create a budget that limits your bills and expenses to less than your income. Analyze ways to reduce bills (such as cutting out cable, shopping for better rates on utilities/insurance, etc.). Review your expenses for ways to reduce your spending. Set limits on what you can spend in each category per month. Keep track of all of your spending.
- Set aside a specific amount of money for reducing debt. The only way to reduce debt is to start paying it off. Determine exactly how much of your budget you want to devote to paying off debt.
- Determine what and how you want to pay off your debt. This is the step where I struggled. When I started this process, I had credit cards, student loans, car loans, home loans, etc. How was I supposed to figure out what got paid first? I found a great website that had a debt reduction calculator that helped me to figure it out. You can find it here: https://www.vertex42.com/Calculators/debt-reduction-calculator.html. It allows you to enter all of your creditors. Then you can model several different options of paying off the debt to see what works best for you. Some people prefer to pay off low balances first so that it motivates them to keep going. Others want to make sure they pay the least amount of interest. As long as you’re keeping track of it and it works for you, go for it. I love that this calculator also gives you a schedule that helps you know when you’ll reach your debt free goal.
- Stick to the plan. This is all about getting out from under a mountain of debt. Commit to your budget and debt reduction plan. It may take a little sacrifice, but it’s worth it in the end.
- Analyze your results. Take time at the end of every month to analyze your spending for the month. If you’ve spent less than your budget, decide if you should put that money in savings or if you want to add that to your debt reduction plan for that month. If you’ve spent more than your budget, figure out what caused you to overspend. Was this an avoidable expense? How can you change this for the next month? Was your budget reasonable? Don’t use this as an excuse. Just figure out what you should adjust to allow you to get back on track.
When I started my career, I found myself significantly in debt. I followed the steps above to reduce my debt. It took me about 3 years to get to my goal. When I did hit the goal, it was a huge relief. It felt like a huge weight had been lifted off my shoulders. I encourage you to get started as soon as possible so that you can have the same experience. Best wishes on your debt reduction journey!