Being in debt is a problem many people deal with. It is often caused by circumstances beyond our control, such as a job loss, health problems or marital break up, or it can be something that builds up gradually due to a general shortfall between what we spend and what we earn. In addition, the current economic climate has made the situation even more challenging for many people.
Instead of ignoring your debt (something many people do), jump start your debt-reduction with these smart money moves.
Get organized.
Your first step should be to gather all of your bills, loan statements and other sources of debt to determine exactly how much money you owe. A spreadsheet is a simple way of doing this. List the money you owe in one column and the interest it accrues in another. In addition to getting you organized this will also make you more cognizant of how much debt you’ve amassed, which in turn can help prevent additional spending.
Track your income and spending.
If you haven’t already, begin tracking your income and spending to get a better sense of your overall financial situation. When you have a complete grasp of your monthly budget you can focus on the most obvious strategy to reduce debt – decrease your monthly expenses and determine how much additional cash flow can go towards making debt payments.
Prioritize your debt.
Now that you have a list of all your debts and corresponding interest rates and a clear sense of how much you can allocate on a monthly basis toward paying off your debt, it’s time to prioritize your debts. Sort the list of debts in a descending order with the highest interest rate at the top. Focus on paying your higher-interest debts off first. For many individuals these are unsecured debts like credit cards. For the rest, continue to make minimum payments so you don’t continue to accrue debt.
Continue this approach – focusing on high-interest debt, while paying minimum payments on the rest – until you’ve paid off all your debt.
Stop spending.
While this is easier said than done, it’s a vitally important step in reducing your debt load. After all – the only way to reduce debt is to stop adding more. Cut out any extraneous spending, avoid buying on credit and do not add additional credit lines.
Contact your creditors.
If you continue to find it difficult to make your payments contact your creditors and try to negotiate a lower rate or a temporary “hardship status.” Depending on your payment history and the creditor’s policies, you may find them willing to help you.
Carrying a lot of debt can be an overwhelming and highly stressful situation. But by consistently following these steps you’ll be able to tackle your debt commitments one by one and work your way toward a debt-free life.
Kim Ross is Second Vice President/Retail Managing Officer at MidWestOne Bank. She works with MidWestOne customers to help them manage their personal finances and identify effective money management solutions.
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