One of the biggest impediments to building wealth is carrying a heavy debt burden. Almost a million people declare bankruptcy every year, often due to unmanageable debt. It’s a dire reality, but even if you feel like you’re drowning in debt, you don’t have to end up a statistic. When it comes to beating back debt, there is no substitute for rolling up your sleeves and doing the hard work. And although no solution is completely fool-proof, the following debt reduction strategies will help stop the endless cycle of debt and put you on the path to wealth building.
Stop Creating More Debt
The first sure-fire way to reduce debt is to stop borrowing money. It will not get you out of your current debt but it will stop your debt situation from growing and getting worse. Make a conscious decision to stop using your credit cards, freeze any lines of credits, and cut back on unnecessary spending.
Face the issue head-on. You need to get crystal regarding your debt. Organize all loan and credit statements into a spreadsheet so you can see at a glance how much you owe per creditor, the respective interest rates, the minimum amount required of each, and the due dates. Putting your debt into perspective will create an imprint in your consciousness, rather than a vague image at the back of your mind.
Start by creating a 90-day spending profile. This will show you the different categories you are actually spending on. Itemize all your monthly expenses: rent, food, gas, utilities, insurance premiums, clothing, entertainment, etc. Your spending history will give you a bird’s eye view of your cash flow within a particular period. A great, free tool to help you do this is Mint.com. Organize your life so that dealing with bills becomes a habit. How? Something as easy as assigning a specific place in your house or office where you place your “bill basket” and sit down to pay your bills can do wonders. You’ll instinctively develop a habit of periodically checking for bills that are due in a couple of days. Consider getting into the habit of assigning a specific day and time each week to pay the bills that are coming due. Consider setting digital notifications once a week on whatever calendar system you use. Once you implement a system like this and commit to it each and every week, you’ll be amazed at how easy it is to stay ahead of debt.
Create a Budget
Creating a budget is a crucial step in debt reduction. Armed with a 90-day spending history that tracks your income and expenses, set your sight on creating a budget. There’s no one-size-fits-all solution for creating a budget, but the key is to be realistic. Introduce manageable cutbacks and sacrifices but avoid total cutouts. Little adjustments often lead to incremental, but significant savings over time. Be prepared to implement those small adjustments as soon as possible.
Develop an Emergency Fund
Begin to create an emergency fund and build on it over time. Start by saving $1,000 to cover unforeseen expenses like car repairs. Aim to eventually put away three to six months of expenses. Emergency funds are very important safeguards against falling back into debt. Credit cards all-too-often become the default source of funds for emergencies and without a buffer of funds for those eventualities, falling back into debt is almost a certainty.
Increase Your Income
If you ’re serious about reducing your debt and building wealth, this is the strategy with the most impact. It’s easier than ever to make some extra income with a side hustle. A few ideas to add income include:
- If you’re paid hourly, see if you can pick up some extra hours
- If your job is commission-based, add some more hours to close more sales
- Get a second job. Freelance and flexible part-time gigs abound that would enable you to work around your normal work schedule
- Have a spare room in the house? If so, rent it out or use Airbnb to rent out a room or your entire home when you’re away
- Rent out your garage or parking space
- Have a garage sale
- Sell your car and eliminate payments, insurance and maintenance expenses. Pay off the car loan from the proceeds and buy a less expensive car or if feasible, go without a vehicle altogether
- Participate in paid online surveys,
- Are you an expert in your particular field? Conduct webinars services like social media marketing, graphic design, web development, SEO work, blogging, ghostwriting, accounting, etc. for businesses
- Create YouTube “How-to” or “Out-of-the-box” tutorials
Reduce Your Expenses
A sure way to increase your overall budget is by reducing your expenses. You’ve already tracked your spending over a 90-day period, so you should have a clear idea of where your money is going. Go through your spending and cut out the non-essentials; stop eating out as often, cut down on energy consumption by installing LED lights (four times more energy efficient), avoid impulse purchases, and reduce entertainment expenses, i.e., cable and magazine subscriptions. Are you healthy? Perhaps you can cut insurance costs by downgrading health insurance. See how you can reduce homeowner or car insurance, and don’t forget about coupons!
Set up a Debt Payment Plan
The decision to utilize a debt payment plan is often a difficult one. It could be a humbling but valuable learning experience and in the end, the prospect of a debt-free existence far outweighs whatever inconveniences are experienced along the way.
The most popular debt payment options in the market today are debt consolidation, credit counseling, and debt settlement.
Debt consolidation calls for the merging of all existing debts into a single monthly obligation at a fixed lower interest rate over a period of time. In effect, a new loan is secured to pay off all current debts.
Credit counseling is the process of advising consumers on the psychology of spending habits and providing the tools to help them develop a budget and manage their finances more effectively. A third party is contracted to negotiate in reducing the interest rate on credit accounts.
Debt settlement has become the most acceptable debt relief alternative. Although it is limited to unsecured loans, it does not require valuable assets as collateral, it can be fast (it takes just two to three years to complete), cost-effective, and results in a guaranteed full settlement of all debt owed either through a one-time payment or monthly installments.
Track Your Progress
It will make the difference between success and failure in your debt reduction strategy. Focus on your progress. Getting out of debt will take time. Be patient and persistent.
Breaking the Debt Cycle
Getting out of debt and staying out is one of the most crucial steps you can take towards creating and building wealth. Increased savings, having the means to fund your dreams, reduced stress, and a higher quality of life, are just some of the benefits of addressing this aspect of your financial life. If implemented, these strategies can help break the debt cycle and you’ll soon find yourself with more options to create a life of financial abundance and the freedom to live your life on your own terms.