Last updated: June 18, 2024
How to reduce your debt
Debt can feel like a heavy weight on your shoulders, but the good news is that there are practical ways to potentially reduce and even eliminate it. Managing your debt wisely might pave the way to a brighter financial future.
How to get out of debt
As soon as you’ve made the decision to take control of your personal financial situation, you may want to learn how to budget and to help get out of debt. Keep one basic but important thought in mind when you go to do this: Having more money going out than coming in is not sustainable. The first step in reducing debt is to stop adding to it. Additionally, there are other actions you can take as part of a comprehensive strategy to help get out of debt.
Use a budget to help reduce debt
It is beneficial to create a detailed budget to track income and expenditures.
You can use this approach to plan and monitor information for debt management. With a budget, you will:
- Record how much net income you have available to spend.
- Track your monthly fixed costs (e.g., mortgage or rent, car or other loan).
- Log your variable spending by category (e.g., childcare, food, transportation, savings).
- Follow what your credit card bills include (e.g., break down a list by new purchases and interest)
Create and track your budget in a spreadsheet or word document or try to find a template that someone else has already created.
Consolidate your existing debts
Consolidating your debts may be an effective strategy for reducing your overall debt. Here are some potential reasons why:
- Simplified repayment: When you consolidate your debts, you combine multiple debts into a single loan or credit account. This means that instead of making multiple payments to different creditors, you only have to make one monthly payment toward your consolidated debt. This might streamline your finances and make it easier to manage your debt.
- Lower interest rates: Debt consolidation offers the possibility of securing a lower interest rate on your consolidated loan or credit account compared to the average combined interest rate on your existing debts. This may result in significant savings over time as you’ll be paying less interest on your total debt.
- Reduced monthly payments: By securing a lower interest rate or extending repayment terms, debt consolidation may reduce your monthly payment obligations. This might provide relief to your budget and free up some extra funds that could be put toward paying off your debt faster.
- Elimination of multiple fees: Debt consolidation may help you avoid paying multiple fees associated with different creditors such as annual fees, balance transfer fees, or late payment fees. Consolidating your debt might eliminate these additional expenses to save you money.
- Improved credit score: When you consolidate your debts, it could have a positive impact on your credit score. By making consistent, on-time payments towards your debt balance, you practice responsible financial behavior and potentially improve your creditworthiness over time.
Are you a homeowner looking for debt consolidation options? Discover Home Loans offers low, fixed rates on home equity loans with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.
Increase your income
Any extra income you bring in can go right to making a dent in your debt.
- Work extra hours – If you’re paid hourly, sometimes working above 40 hours per week can often bring in wages at time and a half of your normal rate.
- Get a second job – You might even be able to work from home with freelancing opportunities or take on a very flexible part-time job.
- Become a dual-career family if only one spouse works now.
- Rent out a bedroom – Through trusted internet sites or community networking opportunities, connect with a potential roommate or part-time renter for when you’re away from home.
- Sell things you don’t need – A garage sale can bring in some cash. Use popular resale websites to efficiently reach even more eager buyers, especially for bigger-ticket items.
Reduce your fixed costs
It’s easy to think of your home and car as expenses that you can’t change, but often you can.
- Refinance your mortgage for a lower monthly payment with either a first mortgage or home equity loan.
- Sell your current home and purchase a less expensive one. While moving can result in new one-time costs and expenses, you may be able to use money from your home sale and savings from a lower monthly mortgage payments to pay off debts that have built up.
- Sell your car and get rid of your car loan, insurance, parking and maintenance expenses. Use public transportation or a bike to get to work or change to a less expensive car.
Reduce your variable expenses
This is where you may have a lot of flexibility, by cutting out non-necessary items.
- Cook at home instead of dining out and shop for the best deals available.
- Stop making impulse purchases.
- Determine your necessities and stick to a plan.
- Cut out luxury items — from coffee-shop drinks to weekend splurges and anything in between.
- Find free or low-cost activities for family fun.
- Get your family engaged in money-saving efforts — for example, working to reduce electricity usage and economizing purchases.
- If they are old enough, ask your kids to get after-school jobs to pay for their own discretionary expenses.
- Exercise and stay healthy to improve your chances of avoiding unexpected healthcare costs.
Reduce your interest payments
It might help to think of interest payments as costs that have no value in return — they are only the charge a lender requires for loaning you money.
- Debt consolidation – Use a balance transfer, personal loan, or home equity loan to consolidate high interest debt into one lower interest payment. This tool might help you get out of significant debt.
- Pay your balance instead of minimum payments – If you can’t, pay as early in the billing cycle as you can to reduce interest accruals.
- Refinance – Take advantage of better offers if interest rates have dropped since you took out a loan eligible for refinancing.
Make extra payments
You might be surprised how much of an impact paying more than your required monthly payment can have on lowering the principal balance on your debts.
- Make lump sum payments – When you get a bonus, money as a gift from someone, or any unexpected influx of cash, put some or all of it towards paying off your debt instead of spending it elsewhere.
- Pay a little more each month – Include whatever extra you can afford on top of your minimum monthly payment to consistently chip away at your debt balances.
- Pay it all off – If you have money saved up that can cover the full amount of any of your sources of debt, use it to pay off entire accounts. Then start to rebuild your savings with the money that you were spending on monthly payments.
Manage your money to reduce or eliminate debt
Manage your budget and implement steps to increase income and reduce debt.
Even while you’re still in debt, effective and consistent money management and budgeting may have numerous benefits:
- Find areas where you can accelerate your debt payment and pull forward your timing for being debt-free.
- Take action to increase your credit score, which may help reduce your current and future interest rates to further reduce your interest expenses. A higher credit score may help you get a better rate when you apply for new loans.
- Reduce the stress of overwhelming debt and lack of control.
- Start creating good savings habits that will last a lifetime. Learn to “pay yourself” as part of your monthly budget instead of spending all your available funds.
- Use some of your freed-up discretionary funds to set up emergency savings, which may provide good financial protection if you lose your job, experience a costly medical situation, or have other unexpected expenses.
- Add to your retirement savings for increased financial security and stability into old age.
Applying the principles of how to get out of debt requires regular attention to your financial situation, which creates good habits for long-term financial health. Get the whole family involved in making good decisions and working toward long-term goals.
Where to go next
- Strategies to reduce or possibly eliminate your credit card debt — How to pay off credit card debt.
- Points to consider when you want to consolidate your debt — The pros and cons of debt consolidation.
- Tap into your home equity — with a debt consolidation loan.
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