Paying off debt reduces stress, frees up income to invest and save, and aids you in becoming more financially independent. However, paying off the bare minimum on your credit cards each month isn’t going to get you where you need to be. Reducing your debt takes research, strategic planning and implementation. This article will give you some basic tips on how you can effectively reduce your debt.
Create a budget
Creating a budget can go a long way in reducing your debt. Account for your monthly income and keep track of all your expenses. Accounting your debt as an expense is an effective way to gradually pay off your debt. For example if you intend to pay off your debt over a one year period, you can divide it equally over twelve months and add each month’s debt to your monthly expense and deduct from your income.
Cut down unnecessary expenses
Consider cutting down on miscellaneous and spontaneous expenses. When paying off debt, it’s important to honestly weigh your needs against your wants and save some of your disposable income towards a debt repayment strategy.
List your debts
You can use a simple excel spreadsheet or any other financial planning software to keep track of your debt, the minimum monthly payment and the interest rate.
Sum up all of your debt
If a budget isn’t enough of a wake-up call about the current state of your finances, a total sum of your debt will most likely be the catalyst that helps you realize your actual financial state. Review your expenses on paying interest, and consider what you could be earning if this interest expense was being invested or saved.
Pay off debt with the highest interest rates first
It is advisable to pay-off of debt sorting it by the highest interest rates to the lowest interest rates. By doing this, you are saving on interest in the long run and knocking off your largest liabilities and with time you will realize the drastic reduction in your debts.