Debt Reduction Strategies

Debt is a big problem today, without households trying to fulfill responsibilities while still maintaining a certain standard of living. But there is only one problem with debt, and that is, it needs to be repaid. Debt servicing (repaying the debt) can become a huge burden on households, if the expense is not preplanned and prepared for. To help households with excess debt, this article provides some good and workable debt reduction strategies. While some debt reduction strategies are fairly simple to implement, some require a fair deal of patience and discipline. Let us start with our list of debt reduction strategies that will also serve as debt management guidelines. Always keep an eye out for debt relief options and debt relief grants while implementing these debt reduction strategies.

Maintaining, Monitoring and Planning a Budget
The best place to start with a debt reduction strategy is together, in your living room. You must sit down with your partner and plan a family budget. Write it down in a book or create a computer spreadsheet. Creating and monitoring a weekly, fortnightly or monthly budget will help you understand where the bulk of your earnings are expended. This helps in cutting down unnecessary expenses, that can easily be curbed.

The starting point of your budget should be the expected net income for a particular period. Maybe you can aggregate both your earnings to reach this figure. When this is done, list out your total anticipated expenses for the same period. Tally the individual expense figures on your list and don't forget your periodic payment costs like car servicing, etc. After you have both the figures, the aggregate net income and the aggregate expenditure, deduct the latter from the former to arrive at your disposable income. This disposable income can be effectively used in your debt reduction efforts. If allocated correctly, small amounts of disposable income can lead to an accelerated debt reduction. This disposable income is the set figure you will be working with, for it is the amount you can spare each month to work towards debt reduction. Now that we have reached the disposable income figure, let us look further to see how this debt reduction strategy is actually implemented.

Provided you don't blow the budget and stick to it with the tenacity of a limpet holding on to a rock, no tide can stop you from your debt reduction agenda. Now, create a debt list, i.e. a list of all your debts in descending order of interest rates. The highest interest rate debt will be listed first, continuing with the lower ones. In one extra column to the right of your debt list, put in the minimum amounts that need to be settled each month. Since you will have already incorporated these expenses when you had calculated your disposable incomes, these expenses are nothing to get alarmed over. Now eliminate one debt at a time, using your disposable income, starting from the debt that requires the highest debt servicing. When I say eliminate, I mean that you should pay your entire disposable income towards this debt relief, while paying just the minimum amounts on the others. This way, you can remove your debt burden, one at a time, and much quicker. Know more on debt settlement pros and cons.

There are few key prerequisites to this debt reduction strategy and they are as follows:

• Make sure you have at least some amount of disposable income each week or each month.
• Be disciplined and dedicated to your weekly/fortnightly/monthly budgeting and budget monitoring.
• Make sure you show some spending restraint. There is no point in making a budget if you don't intend to adhere to it.
• Calculate the amount of time your will require to be completely debt free, given your disposable income. Exercise patience till then, for you weren't saddled with the debt in a day and you won't get rid of it that soon either.
• Do not plan debt reduction on one side and go out maxing your credit cards on the other. The idea is to reduce debt and not create more.

Utilize Assets to Pay Off Your Debt
If you live in an ancient, ransacked cottage, don't despair, you never know what antiques could come your way. Find all the things in your house that you don't necessarily use anymore, nor have any need of in the near future. Big things, small things, household appliances and other assets. Sell these off on ebay and voila!, you have generated some extra income. Use this money carefully, for it is not a repetitive income. Start off a small part time business with it, or use it for other capital generation initiatives. Don't forget your primary objective, debt reduction.

Pay More Each Month
Just like the first debt reduction strategy, this one highlights the importance of paying off more than the minimum amount of the highest interest debt, each month, till it is completely paid off.

Mortgage Payments Restructuring
Reduce your mortgage period down to bi-weekly. This simple tactic can help you to reduce your mortgage debt interest payments along with the time taken to wholly repay the debt.

Refinancing Strategy
You can use refinancing options to pay off your existing mortgage with low interest rate credit facilities. If such low rates are not available to you or if your mortgage contract places a penalty on pre-payment, you can opt for debt consolidation loans, like home equity loans and lines of credit. Be very careful with these though, for the idea is to come up with better and not worse debt than before, by bearing some unnecessary transaction costs. This thing can also be achieved through personal property secured loans, other unsecured loans and credit cards, but once again I caution the strategist to be clearheaded when taking these 'debt replaces debt' decisions. When people refinance their homes in order to create extra money for other purchases (like a car), this debt reduction strategy, in fact, adds to the total debt and increases both the time and the cost of full repayment. Know more about debt consolidation programs.

Transferring Credit Card Balances
Substituting your current credit card with another one that offers lower interest rates is a good strategy for credit card debt consolidation. This may require you to exercise your negotiation skills in order to get good deals from the credit card companies. Beware of the hidden fees in your original contract, before making a seemingly profitable switch. One needs to be extra careful while reading the transfer contacts for clauses, like dramatic interest rate hike if payment is delayed by even one day, short billing cycles, extra charges, etc. Know more about the credit card debt settlement process.

Level Payments Throughout the Installments
Make sure you pay the same amount towards your installment (more than the minimum payment) no matter what the principal amount. Do not reduce you installment amount as the loan principal decreases, as this way, you finish off the loan quicker.

The best results can be achieved if you combine two or more debt reduction strategies, from the ones mentioned above. But before you choose any of the 'debt-displaces-debt' strategies, let me warn you of a few pitfalls. Choose only that debt reduction strategy, that you think will serve you best. Know more about the best debt management programs.

Consolidation Loans
While consolidation loans help with debt reduction by clubbing numerous loans together and forming one loan at a lower interest rate, this is only a good idea for those who are able to pay their monthly bills even without it. This recycling of debt can burden people with excessive debt and no discipline, more than before, because it takes away the bite and softens the blow, when in effect it is only a debt-for-debt swap. These loans also put whatever collateral is put on them, at excessive risk. Know more on debt settlement.

Debt Reduction Companies or Credit Counselors
When enlisting the help of a credit debt counselor, the costs are usually based on your ability to pay. These counselors may be able to negotiate better terms with your creditors and set up debt management programs for you. Unfortunately, this arrangement can be used only if the debt can be settled between 3 to 5 years. This strategy can also be expensive if the fee is contingent on the number of accounts managed. Even when using the debt reduction services of debt reduction companies, be sure to first account for the total costs involved for this debt assistance. If you are in severe debt, you may not have that kind of leisure of choice. Know more on debt relief programs and debt management and credit counseling.

There is so much more to write on the subject of debt reduction strategies, but I hope my general overview would've helped guide you in the right direction. There is just one more debt reduction strategy that I have not mentioned above, because it is the last resort. Filing for chapter 7 bankruptcy or chapter 13 bankruptcy, may serve as the final debt reduction strategy attempt for you. But before doing so, make sure that you are completely aware of the after bankruptcy consequences, as a measure of debt relief. Moreover, bankruptcy does not nip the bud of the problem. Unless you change you undisciplined habits, credit will be availed and debt is bound to reoccur. I leave you with that thought - change yourself!