5 Ways to Reduce Your Debts
July 19, 2012
By Dylan Tansy, America Saves Intern
When people sign up to become savers with America Saves, one of the first things we ask of people is to set a goal and tell us what it is. Having a concrete tangible goal is one of the best ways to maintain motivation, keep perspective, and measure progress. Roughly one in six people that have committed to start saving with America Saves have chosen “paying off consumer debts” as their top financial goal. This is not surprising as approximately 45% of families earning less than $50,000 a year rely on credit for basic needs. While this figure may be disheartening, the truth is that anyone can work toward becoming debt free. Here are five basic pieces of advice that you need to follow if you are serious about taking control of your money:
- Stop borrowing – The bottom line is that your debt will never go away if you are always adding to it. There may be times when you have no other choice but to rely on credit, but you should avoid a revolving balance. Compounding interest will increase how much you owe in the long run and keep you in debt longer. You need to either cut up your credit cards, or hide them from yourself.
- Make a budget - Many people rely on credit because they think they don’t have the funds to cover the costs right now. The reality is that many people have more money than they think but are wasteful in their spending. Spending a month tracking every cent that you use will illuminate all the ways in which you are needlessly wasting money. Eliminate nonessentials spending and substitute those costs with free or cheap alternatives. America Saves has tons of suggestions on how you can reduce spending that can save you thousands over time.
- Make a Plan – Now that you are spending less than you earn with your budget, you need to make a plan for eliminating the debt your currently have. The “snowball strategy” is one excellent and simple way to commit to a budget and goal. First, commit to paying the minimum on every balance. Next, pick the account with the highest interest rate and pay as much extra as you can until the entire debt is eliminated. Once you do that, add the total amount you were paying on that debt to a new one. Continue this and for each new account you will be paying more and more in order to eliminate debts faster while maintaining an identical amount of spending as when you first started. By the time you finish, your budgeting skills will most likely have improved to the point that you can add even more to the amount you are paying toward your debts.
- Pay Down and Reduce High-Interest Debt – Wherever possible, look for ways to lower your interest rates. Compounding interest is a burden that adds thousands as well as years to consumer debt. There are often ways to get lower interest rates that will really pay off, and help you get out of debt faster. Contact your creditors directly to see if they can lower your interest rate.
- Do not slack off – If you stick with your repayment plan you can become debt free and have a surplus of money that you no longer need to devote toward paying debt. Celebrate, but do not get cocky and backslide. Responsible financial behavior is a lifelong process and you do not want to be working forever. Now start saving for retirement in the same deliberate and consistent manner you approached your debts. Following these steps greatly increases your chances for long and lasting financial security that everyone hopes for.
For more resources on debt and saving, check out these other resources: