Reducing Debt

Take Control of Debt Repayment

At first, paying down debts while staying on budget can be a challenge. Fortunately, creating a detailed plan of action can help you feel more in charge of your finances—making it easier to pay down debts and build the financial future you want. 

Setting a few parameters on how to allocate your money can help you stay on track, says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling in Washington, D.C. “We recommend that people not spend more than 30 percent of their take-home pay on housing and no more than 20 percent on debt,” she says, adding that your vehicle payment should be included in your total debt.

But what happens when your monthly earnings aren’t enough to cover basic expenses and put 20 percent toward debt repayment?  

“There are only three ways to find the money to pay down debt: increase income, decrease expenses or both,” Cunningham says. “Most people intuitively know to tighten their budget belt but may be unwilling to increase income by taking on a second job.” If this is the case, Cunningham says it’s worth considering whether there’s a second job that you’d enjoy doing. If so, this could make the prospect of taking on extra work more appealing.

As you look for ways to reduce expenses and increase income, you’ll want to ensure the money you free up is being used as wisely as possible. Here are some tips for making the most of that extra cash:

Plan when and how you’ll pay down different debts

Setting priorities about which debts to pay first can help you save money down the road. The first thing you should pay back is secured loans—such as those issued for a car or home—which represent things you could lose through repossession if you don’t pay, says Dara Duguay, author of several books on personal finance and executive director of the Credit Builders Alliance in Washington, D.C.

After secured loans, Duguay says many people find the “debt snowball” method useful to prioritize their debts and guide their next move.

“I think that psychologically the snowball method can work well,” Duguay says. “You feel like you are making progress.”

The snowball method

The method works like this: Make the minimum monthly payment on all your debts with the exception of one that you strategically target to “power pay” faster. 

Approaches to the method vary, but typically you’ll start by paying off the accounts with the smallest balances first, giving you the psychological boost of crossing completed debts off your list. As you pay off the smaller balances, you work through the hierarchy of debts until you’ve achieved your ultimate goal of eliminating debt.

Another approach is to go after the debts with the highest interest rates first, so you pay the least amount of total interest costs over the course of your payback period. You can download a free spreadsheet from Lifehacker to understand how this works.

“A person has to select the payment method that is right for them,” Cunningham says. “If they’re a numbers person, they’ll respond better to power paying the largest balance with the highest interest as it’s doing them the most financial harm. If they need that good feeling of accomplishment to stay motivated, they’d be a better fit for power paying the smallest balance first and working their way up the ladder.”

No matter how you choose to manage your debts, maintaining a balance that allows you to make progress and pay for the things you need is a great first step on the way to finding your financial footing.

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