Our Tips to Reduce Debt in the New Year
If one of your New Year’s resolutions is dealing with your debt, here are a few strategies to start minimizing your debt for the current year:
1. Organize Debt by Interest Rates
One of the most important aspects of managing and reducing debt is to understand where you stand financially. The best way to make sure you do this is to make a list of all your bills so that you can clearly review all of your expenses. From here, order them according to their interest rate, highest to lowest.
2. Paying Up
Once you’ve organized your debt there are two ways to potentially pay it off, the first of which will cost you longer over the long run but will potentially motivate you to pay your debt down faster.
This method involves paying off the debt with the lowest balance first and working your way down the list to the largest debt. By paying off the smallest debt first, you may be motivated to continue paying off your debts and feel a sense of accomplishment as each debt is erased.
The problem with paying bills which have the smallest balance first is that you may end up paying more interest over the long run if the smallest debts have the lowest interest rates, as opposed to paying off the high-interest bills first.
Paying the higher interest bills first allows you to reduce the interest you will be paying on your total debt. Paying these higher interest debts first will ultimately help you get out of debt faster. This means you will pay less total interest on your debt over time.
4. Never Miss Minimum Payments
While you do want to pay off bills that are charging you higher interest rates, you also want to make sure you are not adding to your debt load by incurring additional interest and extra fees.
Before paying off principal from high-interest rate debts, make sure you pay all of your minimum payments on all debts to avoid additional interest and penalties. Once you have made your minimum payments, you can then allocate any extra monthly savings to pay off the bills with the highest interest in order to reduce your total interest and debt.
5. Create a Realistic and Strict Budget
Making sure you reduce your debt will take planning and sacrifice. In order to make sure you can manage and reduce your debt heading into 2017, you should plan and establish a monthly budget that includes all monthly expenses as well as spending money, debt reduction payments, and savings for quarterly or annual bills.
Make sure you identify and reduce unnecessary expenditures. Reviewing your last three bank statements or credit card statements can give you a clear picture of your monthly finances.
This will make sure that you are prepared to pay for all expenses and that you are not caught off-guard by unexpected bills. The key is to set a basic budget and live within it.
This doesn’t mean you can’t enjoy yourself; it just means you have to plan for it. Provide for a certain amount for miscellaneous spending each month that can be used for entertainment, however, stick to the allocated amount.
This may involve planning extracurricular activities with a lower cost, such as parks, exhibits, and potlucks. This will ensure you are not spending money that would otherwise further reduce your debt load and allow you to put more away to save or pay off current debts.
6. Establish an Emergency Savings Fund
Once you establish a clear monthly budget and are able to live within it, establishing an emergency safety fund is a great way to avoid incurring additional debt. Although this can be difficult, your monthly budget will help you get started.
An emergency is usually considered to be an out of the ordinary expense that cannot be put off, such as a medical expense or a car repair. However, this time you’ll be prepared when it happens and you won’t go further into debt to make the payment.
A fund of $1000 is a realistic goal that can go a long way in the event of an emergency expense.
7. Contribute Extra Money
If at any time you earn extra income, such as a bonus, or come into some money, such as an inheritance, it is always a good idea to put it towards paying off your debt.
Although it may be tempting to spend it on a treat, such as a trip, a new tv, or a new outfit, in the long run eliminating your debt will give you the peace of mind that no consumer good can give you.
8. Manage Your Lifestyle
It may seem simplistic, but if you are having trouble with debt – stop spending! Ultimately, one of the best ways to combat and reduce your debt is to make sure that you are not taking on more.
More than that, you should be consciously working to pay it down. A simple and effective way to do this is to downsize from what you are currently spending on non-essential expenses. There are many alternatives to expensive entertainment that can be just as rewarding.
9. Increase Income
Increasing your income is another, although more challenging way, to reduce debt. Hobbies can be turned into a small side business, or part-time work can assist in increasing your income until your debt load is paid off.
10. Reward Your Successes
Paying down debt is a challenging process, but the mental and emotional freedom from the stress of your debts is well worth the hard work to eliminate your debts.
Motivating yourself by rewarding yourself when you do pay off debt is a great way to ensure you stay on track and progressively work towards reducing your debts.
How We Can Help
The professionals at Spergel can help you get started in ensuring that 2017 is the year that you deal with your debt. Speak to one of our debt professionals who will listen to your particular situation and give you custom advice as to the options available to you.
Give us a call for a free no obligation consultation today at our toll-free number 310-4321.