Strategies to Reduce Debt
May 22, 2023
Paying down debt is possible when you know what you owe and what you can do to repay it. Develop a debt reduction strategy that works with your finances.
It’s often tempting to over spend at times and simply decide to use plastic instead of cash. However, over spending now often leads to financial stress later as well as delaying the achievement of your financial goals. Set your budget and stick to it! Reaching your financial goals is well worth the restraint today. Keeping this in mind, here are some strategies to reduce debt.
Debt reduction worksheet
The Consumer Financial Protection Bureau has created a debt reduction worksheet that helps you develop a strategy for debt reduction that works with your personal finances. In order to effectively use this tool, you will need current copies of your bills and any interest payment information. If you need assistance in organizing your monthly payment schedule, you may find this worksheet to be a helpful tool to keep all the information in one place as you tackle your debt management.
There are two basic strategies that can help you reduce debt: the highest interest rate method and the snowball method. Each method has its own pros and cons, so review each one carefully to see which will work best for you.
Highest interest rate method
This approach focuses on your debt that carries the highest interest rate, such as credit cards, student loans, and medical debt. The primary goal with this method is to pay off the highest interest rate debt as quickly as possible, because it is costing you the most. Although it may not feel like you are making much progress, this method will help you eliminate your costliest debts first—which will ultimately save you money.
This approach focuses on your smallest debt first. The goal is to pay off the smallest debt as quickly as possible while continuing to make minimum payments on all of your remaining debt. Any extra funds you have are allocated to paying off the smallest debt, which helps you pay it off faster. Once you have paid the smallest debt in full, you dedicate those available funds to the next smallest debt. In essence, you create a “snowball” of payments as you eliminate each debt. This method allows you to see progress more quickly as you are paying off smaller debts. However, it is important to note that you may pay more in the long run as you are not focusing on the larger more costly debts.
Let your motivation help choose your method
If saving the most money is your motivation, then you may want to consider trying the highest interest rate method to reduce your debt. However, if you are motivated by seeing progress quickly, then the snowball method may be the best strategy for you. Whichever one appeals to you the most, choose the strategy that works best for your situation and then put it into action.
Content courtesy of the Consumer Financial Protection Bureau.
This content is for informational purposes only. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific advice from their own counsel.