Tuesday, May 3, 2011

Debt Reduction Tips

Yesterday I had a guest post about debt reduction for single mothers so today I thought I would share with you my debt reduction techniques. Having been a single mother I found that the stereotype is far from the norm.

When I was single there was more available in terms of government assistance, but depending on your family income there is government assistance available to many (here in Australia at least). You can find out all sorts of information on the Centrelink website. You can do estimates and check rates of pay to see if you are entitled to any assistance.

Now, on to the debt tips.

1.) List all your debts. Some people live in denial about how much they owe. Most people I know are well aware of their financial situation. Nevertheless, the first step is to list every single debt you have, all credit cards, loans both through banks/financial institutions and from friends or family. List where the money is owed, how much is owed, the interest rate and payments.

2.) Work out your budget. List all your income vs your expenses. If your expenses exceed your income, you will need to cut back on expenses somewhere, or increase your income. (It is great if you can do both!)

3.) Negotiate. If your repayments are just too high, try calling the people you owe money too. You might be able to negotiate a smaller payment over a longer term or a reduced interest rate. If you are lucky you may get a reduction on the total debt if it can be paid in full by a certain date. I saved my mother in law $2,500 by renegotiating her loan. I also saved myself $2,000 by checking paperwork and knowing my rights. A company tried to charge me interest on an interest free product. I got the interest removed. Later I offered full payment of the remainder and received a $600 discount.

4.) Work out your debt reduction plan. If you are disciplined the best way to pay down debt is to pay the debt with the highest interest first as this will save you the most amount of money. Mentally, this is not always the easiest which is why Dave Ramsey recommends you pay the smallest debt first. (Check out his baby steps for debt here.) Clearing that smaller debt creates a sense of achievement and will help you stay on track. Once you have cleared a debt, whether it be the highest interest or the smallest total debt, do the debt snowball. That is put the money you were paying on that loan onto the next loan. Once that loan is paid out, put both the payments from debt 1 and the payments from debt 2 onto debt 3. You will pay your debts down much faster.

5.) Set up an emergency fund. Most people end up putting money on their credit card for emergencies because they do not have $1,000 or more saved to cover these expenses. Dave recommends doing this before paying down your debt.

6.) As your debt decreases, decrease the limit. This is very easy with credit cards. Whilst most companies will try to talk you out of it, reducing the limit really is the best way to ensure you do not spend on that card again. You can reduce it every $100 or $500, whatever you like. Just pay it off and get rid of it.

7.) Put all excess money onto your debt. If you can earn a little more money, get a pay rise, tax return or do some over time, put this money on the debt. It is not money you initially had or were relying on, so put it on your debt.

8.) Live frugally. Cutting back is not always possible, but some simple changes you might not already do can make a big difference such as switching things off at the wall, wearing warm clothing at home and blankets instead of having the heating on high will save on electricity. Introducing an easy soup night or adding some lentils, potatoes or other vegetables to a stew will make it and your grocery budget stretch. Menu plan and buy what is on special. Look online or ask friend for frugal tips. There are lots out there. Click here to see some of my money saving posts.

9.) Check your interest. Find out what your daily interest is on your loans. Since interest is usually calculated daily, but charged monthly you could be shocked at how much interest you are paying. Even on a smaller loan $35 interest a day is not uncommon. What could you do with that money?

10.) Search for a better deal. If you can, switch to an interest free credit card or lower interest rate loan. Anything to reduce the interest and payments. Once you switch cancel the other card or loan. Too often people end up keeping both and get in worse debt than they were before. There are heaps of sites you can use to compare everything from your mortgage to your savings account.

11.) Once you have paid off your debt, continue to save to avoid being in debt again. It is a great feeling to be debt free and have money in the bank. It means you are on the way to financial freedom.



For more advice on debt reduction check out Dave Ramsey or finance blogs like Punch Debt in the Face (paid of $28,000 of debt in 2 years) The Simple Dollar, Penniless Parenting or you can join sites like Simple Savings who have a forum with members more than happy to help.

Yes simple savings is an affiliate link, but I am a current member, so not pushing something I don't think is good!

2 comments :

  1. What a fantastic post! Lot's of great information in there :) I did a post the other day on our debt reduction for this yr, If ur interested in reading it, here's the link

    http://organisingmycrazylife.blogspot.com/2011/04/debt-slashing.html

    I'd have to agree with all those sites u've listed above, I follow Dave Ramseys Baby steps, I've checked out the finance blogs, plus I'm a member of Simple Savings, and if it wasn't for all of the above I wouldn't have been able to pay off as much debt as we have.

    I love ur posts there always jam packed with great info :) Well done.

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  2. Great post! Even though I personally don't have a lot of debt at the moment, there are some good ways to save my parents money and get myself into good habits for when I do...you are seriously a smart cookie! :D

    ReplyDelete

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