by Eric Goudie

Created on: September 27, 2010

A debt reduction plan is your simple, no-nonsense path out of your current financial troubles towards a future where you never incur debt again. Money’s money, and whether you’re dealing with a mortgage, student loans or the accumulated balances of a number of credit cards there are a variety of practical ways you can eliminate debt from your life forever, but it all starts with a sensible plan.

List your debts

Compile a list of your debts, using the most up-to-date statements or records that you have. Get the numbers in front of you in black and white, so that you know the exact remaining balance of each and every debt you have, as well as a cumulative total.

Sort and rank

Beside the remaining balance for each of your debts write down the minimum payment, and when that payment is due (weekly, monthly, etc). Then rank your debts in order of importance – the overdue mortgage payment is more important than the overdue hydro bill – you can live without electricity much easier than you can live without a home. After their importance to your survival debts should be ranked by interest rate – those with higher rates of interest like credit cards are hurting you more than those with lower rates like student loans.

Renegotiate

Call the people and companies that you owe money to for a change, and instead of having them harassing you for money harass them for a lower interest rate on your account. Some creditors will be inflexible, while others (especially credit card companies) can be talked down a few percentage points, sometimes more.

Cut, cut, cut

In order to get out of debt you must be ready to make some drastic, often painful changes to your lifestyle. This is the hard part, and it is where many debt-reduction plans break down. Cut up your credit cards, keeping just one (the one with the lowest interest rate) for emergency use only. Stop buying new clothes – you have enough already. Stop eating out or ordering out and prepare your own meals yourself. Take a bag lunch. Don’t renew your golf club membership. Forget about luxuries like music, movies, or going out to the bar with your friends. If you’re serious about getting out of debt you have to be ready to endure some short-term pain for long-term gain.

Add extra income

Drastically reigning in your spending should give you enough to meet most of the minimum monthly payments on your debts but this will result in a very long amortization period, in which you will pay a lot of interest while you slowly chisel down your principal. In order to pay down your debts faster you should consider finding a second part-time job to supplement your income, or see if there’s a way to get more hours where you currently work (and if you don’t have a job you will need to get one in order for any debt reduction plan to work in the first place). If you have items you no longer need or want you can hold a yard sale or sell them on EBay for a one-time infusion of some extra cash.

Set a goal

Set several goals. Calculate the date when you will have enough money to pay off each of your debts, and feel the exhilaration of meeting and beating those targets. Pinpoint the day you will be debt-free. How will you celebrate? What will your life be like after you are out of debt?

Getting out of debt is hard. It involves making painful concessions and facing some hard choices about what you are going to do in order to return to a debt-free life. Having a simple, practical plan in place is the first step to getting there.

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