Steps of a Debt Reduction Program

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When planning to manage something as significant and controlling as debt can be, you need to make sure you approach with a clear plan and a clear goal to ensure success. A debt reduction program may look different for different people in different types of debt which is why we are going to give you the tools you need to develop your own debt reduction program which works for you and your debt, where the first step is identifying the type of debt you are trying to reduce, and then setting about to successfully control that debt.

Identifying Your Debt

There are three main types of debt that you can have, you may have just one or two or you may have all three but it is important to be able to tell them apart as each needs to be managed differently. To identify your debt, look at whether it is:

Mortgage debt. This is the debt you have gone into to buy your home or an investment and if you are in mortgage debt for an investment property, the interest on this debt is often tax deductible. Mortgage debt can also be a good kind of debt because often the amount you owe is less than what the home is worth and if you are in desperate need of clearing your debts you should be able to sell your home and make a profit from the equity which you can then use to repay other more crippling debts.

Installment debt. You may have installment debt in the form of a car loan or a personal loan and installment debt will be paid off over a set number of payments of a set amount.

Revolving debt. Revolving debt must be paid each month and the amount you don’t pay off is charged interest. As a result you can be making the minimum payment each month and take over 10 years or longer to repay the debt in full. Revolving debt also has a high interest rate and all of these factors combined can cause many people a lot of financial stress because revolving debt is hard to manage and often misunderstood.

Build a Step by Step Program to Reduce it

When you are trying to get out of debt you will come across any number of services, programs and systems which often encourage you to download, join up and ultimately pay for help in taking control of your debt. However here you will find seven simple steps which you can adapt to your debt and your situation for a free debt reduction solution.

• 1 Decide to be debt free Sounds simple doesn’t, that you can just decide one day that you are going to be debt free,however the first step really is as simple as that and while it may not be easy to admit that you need to take serious control over your finances, once you do the decision will feel liberating.
• 2 Make a record of existing debt Before you can decide where you are going and how you’re going to get there you need to know where you are and you can do this with tools you already have, either a piece of paper or a spreadsheet program on the computer. Create a separate sheet of paper or worksheet on the computer for each of the three types of debt you have. Then as you list each type, record the minimum payment amount required, how much you need to pay to reduce the principal, the interest rate you are being charged and the balance you owe. Arrange each debt entry in the order of the amount you owe, with the lowest at the top ending in the highest. With your list collated make calculations of how much money you owe to your debts each month.
• 3 Make a budget When you make a budget you need to be very honest and include everything you spend in a month from food, services, utilities and insurance to clothes, alcohol, smokes and coffee. Don’t worry if you forget some things or can’t quite remember how much you spend on lunch at work because that is where the next step comes in.
• 4 See how your budget works Now that you have all of your expenses and income in black-and-white try sticking to your budget for a least three months to determine how accurate it is and find areas which need adjustment. Over the three-month period you will be able to develop an accurate and workable budget as long as you make sure not to use any form of credit to meet your budget requirements, and once you have your budget locked in you can start your debt reduction program in earnest.
• 5 Start paying off debt Looking at your list of debts, focus on the debt which has the least amount owing and use the funds from your budget which you now know are available and make a payment which is larger than the minimum payment required for that debt. Even if the minimum repayment required goes down as you reduce the debt do not reduce your payment, continue to pay off your debt with the money you have spare in your budget. When that debt is paid off you will have more funds available in your budget.
• 6 Celebrate your repayment success It is very important to celebrate your successes as this is where many debt reduction programs fall down because they are focused on the end goal of being debt free, when really it is such a long process that you need some light a little closer than the one at the end of the tunnel. Make sure you celebrate with just a small treat which you can pay for in cash otherwise you will be undoing all of your hard work to this point.
• 7 Snowball your surplus Once the smallest debt is repaid go back to your list and start back at step 5 to repay the second smallest debt, because now you will have the surplus amount from your budget plus the amount you were paying to the debt which is now repaid. What was once a small budget surplus is now snowballing into a larger and larger repayment amount, allowing your debt reduction program to gain momentum as you approach the larger debts. Another important part of the snowball surplus repayments is making sure to add any windfalls you get to your repayments, this means if you get a raise at work, a healthy tax return or cash in a birthday card make this one-off larger repayment as part of your snowball repayment amount to speed up your debt reduction program even more.The snowball system of this debt reduction program works because it does not allow you to go backwards so even though you may feel as though you are trundling slowly along, it is important to remain focused and believe in the system to put yourself in a better financial position.

Alban is a personal finance writer. He offers tips on how to manage personal finances, debt and how to choose the best low interest credit cards online

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