Last updated: July 04, 2023

Managing Debt

How to reduce your debt

Mother teaching her daughter about saving up and eliminating debt

As soon as you’ve made the decision to take control of your personal financial situation, you’ll want to learn how to budget and get out of debt.

The first step in reducing debt is to stop adding to it. You can do this in two ways: reduce purchases and reduce interest payments. As you follow these tips for how to reduce debt, you’ll gain some immediate benefits.

Use a budget to 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.

Woman plays with her dog while taking a break from evaluating her options to pay off debt

Look at ways to reduce or eliminate debt to strengthen your finances for future opportunities.

5 ways to reduce and manage your debt

Once you have a budget, you need to balance it. Keep one basic but important thought in mind: Having more money going out than coming in is not sustainable. To avoid getting into this situation, there are actions you can take to prevent it.

1. 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.

2. 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.

3. 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.

4. 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 is perhaps your best tool to 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.

5. 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 has 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 an emergency savings, which can 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.

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