Smart Strategies to Reduce Debt and Save More
By Herb White, MBA, CFP, East Denver LIVING WELL Magazine
Sitting down to work up a plan to reduce your debts can seem as much fun as a trip to the dentist. But the rewards are worth it in the end. Reducing debt means peace of mind without the nagging burden over your head. In many cases, it also means that you can turn a corner in your life and be able to plan ahead to achieve financial goals rather than always being in catch-up mode.
To get started, here are both some new and tried-and-true strategies to reduce that mounting debt. Use them all for the quickest results, or select the ones that make the most sense to you. Remember to keep your eye on the prize as you tackle this tough assignment.
The Remainder Strategy
Many people are motivated to work on their debt only when they are in the mood or when it fits into their busy schedules. So the first step is to carve out some set time for a weekly financial hour (or it could be daily in the beginning and monthly as you get rolling.) For added incentive, invest in your debt reduction plan by turning it into a “real project.” Go to a container store and purchase colorful files, file boxes and labels. This small expense will help you think of your work as a real project. Then set up a formal area in your home where you can work efficiently and without interruptions.
Next, figure out which accounts you should pay, in what order you should pay them and how much you need to pay to eventually eliminate your debt. This approach will help you tailor a plan that fits your budget.
- Make a list of the debts you owe. You might start by getting a copy of your credit report from one of the credit reporting agencies. The report will list your financial obligations from all creditors that report to these credit bureaus. Add to the list any other debts that aren’t reported by using your most recent billing statements.
- Determine the best order in which to pay them off and make another list. Rather than paying a little on each account and not feeling that you are making any headway, consider paying down the largest that also has the highest interest first. Some people prefer paying off the smaller debts first because they can be done with an account faster; however, the best way to optimize your money is to tackle the high-interest accounts first, one by one if feasible.
- Calculate how much you will be able to pay each month. Figure your discretionary income by subtracting your fixed, necessary expenses from the total of your income sources. Then subtract how much extra you know or think you will spend during the month (consider using the handy Savings Accounts Strategy below). The Remainder is what you can spend on your debts. If you see that you will run short and be unable to make a payment that reduces your debt, do some rethinking of your use of your discretionary income to loosen up funds for this project. Use a debt repayment calculator to find out how long it will take to pay off each debt, planning to pay both the minimum due plus the Remainder amount.
- Then, as each debt is paid off, use that same Remainder payment that would have gone to the account to make a larger payment to the next debt on the list. With this system, if you always use that money to pay off debts rather than pocketing any of it, you will find you are out of debt much faster than anticipated.
The Savings Accounts Strategy
In the meantime, start on your Savings Accounts Strategy. Instead of viewing all your expenses as one big burden, make separate, manageable accounts for the major areas of your financial life, such as Investments, Family, Work and Emergency. Write down your goals for each of these areas. For instance, Investments could cover long-term savings goals, Family could be a wide ranging category to help with such items as vacations and school expenses. An Emergency account is always important. Instead of simply setting aside money in a checking account that you earmark for an emergency, make it a real account and keep it funded.
If you have complex accounts—for instance, if you are a small business owner—or if you feel your debts are overwhelming and not workable on your own, ask a professional financial advisor for help.
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Provided courtesy of Herb White, MBA, CFP, a Certified Financial Planner™ with Life Certain Wealth Strategies, 8400 E Prentice Ave #715, Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities.