Debt may be debilitating; however, when used responsibly, it can be a tool that enables you to make larger purchases such as cars, automobiles, and medical care. Debt may also provide you with the funds needed to cover an emergency. However, large amounts of debt may be crippling to you if you are not making the necessary principal payments. To ensure that interest on your loans doesn’t make repayment appear impossible, you should consider making a debt reduction plan.
How to Create a Debt Reduction Plan
Creating a debt reduction plan may enable you to better manage your debt. Left unaddressed, the principal balance of your debt may increase drastically due to fees and compounding interest. A debt reduction plan could help you avoid the risk of your debt increasing drastically. Here are four steps that you could take in creating a debt reduction plan.
1. Audit Your Expenses
When creating a debt reduction plan, it may be important for you to know where all your money is going. By auditing your expenses, you may be able to calculate the proportion of your income that is going to bills and debt. To audit your expenses, we suggest filling out a spreadsheet with all of your bills and monthly payments. This will allow you to keep tabs on how your money is being dispersed and determine what costs could be unnecessary.
2. Audit Your Debts
After creating a list of expenses, you should then create a list of debts. This list should include how much is paid toward your debts each month. Debts that should be included are credit cards, existing personal loans, student loans, and medical debt. This audit should enable you to determine which debt holds the highest interest rate and decide which ones should be paid off first.
3. Begin Creating a Plan for Paying Down Debt Each Month
Once all of your expenses and debts have been identified, you should then outline the steps for the debt reduction plan. These steps should include credit counseling, part-time work, and even debt consolidation loans. With the steps identified, an individual may then create and follow through with the plan for paying down their debt. Further steps may include credit counseling, which may provide you with insight into the underlying behaviors that cause your debt, and not adding new charges to any of your credit cards.
4. Consolidate the Principal Balances
A debt consolidation loan may enable you to create a debt consolidation plan to pay your monthly balances easier by consolidating them into one easy payment. With a fixed-rate personal loan, the interest rate on the personal loan balance may be lower than the interest rates on all existing debt. Personal loans also offer easier, one-time monthly payments that may help you to keep track of your debt reduction plan.
Why A Debt Reduction Plan is Important
Creating a debt reduction plan allows you to effectively address your debt. You could identify the root causes of your debt, as well as what may trigger your spending if the debt is comprised of credit card debt. With a disciplined approach, you could prevent your debt from creating a seemingly inescapable avalanche due to compounding interest. With discipline and guidance, a debt reduction plan could be a sound approach to getting out of debt.