Debt comes to you through three channels.

One, you have borrowed money from a financing source for a specific and well intended purpose which you have to pay back in installments as per clearly agreed terms and conditions. Your monthly pay back commitment is crystal clear; it is mostly by virtue of your earning potential that you have obtained your loans. Example: A home loan or a car loan.

Two, you have borrowed some amount from an acquaintance to tide over an unexpected emergency situation. You have to pay it back, with or without interest, within a time frame mutually agreed by you and your financier.

Three, you keep spending joyfully through your credit cards and when the monthly bills arrive, you opt to pay "the minimum amount payable" and take the rest of the amount into credit, to be paid back later as per the terms of credit card.

When it comes to making a sound household budget and understanding its influence on debt reduction, all the three types of debts we discussed above have a strong bearing.

In your household budget, your committed monthly loan repayment amount from the first type of loans will be one of the clear and prominent items in the list. You cannot wish away this expenditure. This expenditure is like other fixed and non-negotiable items in your budget like your house rent.

When it comes to repaying your casual/ unexpected borrowings falling into the type two category, perhaps you would get tempted to postpone the repayment, because, after all, you got it from a friend who might not sit on your head to get it repaid. Though such an attitude may help you in reducing a yawning gap between income that is less and expenditure that is more, it has every potential to keep you under debt trap for long.

When you fail to repay something that somebody loaned to you in good faith expecting you to repay honestly sooner, you start compromising on your principles and values. Never do that mistake. Any such casual borrowings must be repaid promptly. You must include it in your expenditure item in your budget. If you can't repay it in one go, you must break it into a couple of installments and be sincere to pay it off every month without being asked.

Now when it comes to the third category of loans, namely uncontrolled spending through credit cards by relying on the deferred payment option given to you by the credit card firm, it is the most potent weapon that can ground you into debt trap with very huge interest burden in the long run.

It is in the above category that your budgeting and discipline to sticking to budgeted spending plays a major role in debt reduction.

Every element in your budget, be food, drinks, clothing, gas, car maintenance expenses, entertainment, gifts to others, medicines - every single element must be scrutinized and monitored to avoid overspending. Every attempt must be made to economize the expenditure on them.

If you visit a shopping mall, carry your budgeted purchase list and never get tempted to buy anything unbudgeted.

You aim in using credit cards must be to pay off the entire amount that comes in the credit card bill on due date promptly.

To develop this singular discipline, preparing a sound household budget helps a lot. It is not just by preparing the budget but by sticking to its limits that you pave the way for debt reduction.

Learn more about this author, C.V.Rajan.
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