Lesson 10: How to Reduce Debt
Although debt can be good or bad, at some point you might find that you have more of it than you want. Bills can pile up, and if you don’t take care of them, they’ll only get worse. But even if it seems really hard, reducing and even eliminating debt is possible. It takes discipline and time, but you can do it, and in this lesson we’ll teach you how.
So let’s start with the first step in managing debt: finding some extra money to go toward your payments. The best way to do this is by spending less, so look at your monthly costs and separate your want purchases from your need purchases. Look for ways to save, and the solution might be as simple as cooking at home instead of eating out.
Once you do that, use the money you free up to make payments on each outstanding debt. Cover the minimum amount each month on all of them, but choose one to pay off in full. There are two ways to do this: one, you can use something called the snowball method and start with the debt that has the smallest balance, or two, you can go with the avalanche method and target the debt with the highest interest rate. Whichever you choose, pick a debt of your choice and once it’s paid off, redirect your money to another one. Keep paying until all your debt is covered.
Most people find that reducing expenses can free up a good amount of cash, but sometimes it’s not enough. Picking up extra hours on the job, or taking a side gig, might be a good idea. Also, make sure that any unexpected income you receive goes straight toward your payments. So if you get a bonus at work or hold a garage sale, put that money directly toward your debt.
If you still find that you’re overwhelmed, call your lenders and ask them to help restructure your debt. It’s important to do this before you miss payments, but even if a couple have slid by, it’s still possible that they can help. Your lenders want to receive the money you owe them, and they may reduce your interest rate or cut the size of your monthly payments if it means they’ll get their money back.
If your lenders don’t help, another option is to contact a credit counseling agency. There are non-profit organizations that provide classes and counseling, but watch out, because some agencies are more interested in helping themselves than helping you. Companies that offer expensive, one-size-fits-all plans might create more problems than they solve, so do your research before signing up.
To recap, here are the three steps you can take to reduce your debt.
One, cut your expenses; two, create and use extra income; and three, contact your lenders or a credit counseling agency.
All of these tips are sound advice, but none is a magic bullet. Also, they’ll only work if you stick to them, so make a goal, and follow through.