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Debt Reduction Strategies

Sayali Bedekar Patil Jun 6, 2019
Debt is a way of life today. It is very easy to consider it as a way of financing expenses, and it is even easier to tap it. However, debt reduction strategies are a must today, to keep debt at a manageable level.
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 it, that it needs to be repaid. Debt servicing can become a huge burden on households, if the expense is not preplanned and prepared for.
To help households solve this problem, here are some workable reduction strategies. While some are fairly simple to implement, some require a fair deal of patience and discipline. Always keep an eye out for relief options and relief grants while implementing these strategies.

Maintaining, Monitoring, and Planning a Budget

Your living room is the best place to start with a strategy. You must sit down with your partner and plan a family budget. Note it 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.
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, i.e., the aggregate net income and the aggregate expenditure, deduct the latter from the former to arrive at your disposable income.
This income can be effectively used in your efforts. If allocated correctly, small amounts of disposable income can lead to an accelerated reduction. It is the set figure you will be working with, for it is the amount you can spare each month to work towards reduction.
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 reduction agenda. Now, create a list, i.e., a list of all your debts in descending order of interest rates. The one with a highest interest rate will be listed first, continuing with the lower ones.
In one extra column to the right of your 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 one that requires the highest servicing. When we say eliminate, we mean that you should pay your entire disposable income towards this 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.
There are few key prerequisites to this 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.
✦ Ensure to show some spending restraint. There is no point in making a budget if you don't intend to adhere to it.
✦ Calculate the time required to free yourself from this burden, given your disposable income.
✦ Do not plan reduction on one side and go out maxing your credit cards on the other. The idea is to reduce the liability and not create more.

Utilize Assets

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 generate 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.

Pay More Each Month

Just like the first 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 interest payments along with the time taken to wholly repay the loan.

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 consolidation loans, like home equity loans and lines of credit.
Be very careful with these, for the idea is to come up with better ideas, by bearing some unnecessary transaction costs. This method can also be achieved through personal property secured loans, other unsecured loans, and credit cards, but once again, be clear-headed when taking these decisions.
When people refinance their homes in order to create extra money for other purchases (like a car), it in fact, adds to the total debt and increases both the time and the cost of full repayment.

Transferring Credit Card Balances

Substituting your current credit card with another one that offers lower interest rates is a good strategy. 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.

Level Payments Throughout 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 options, from the ones mentioned earlier. But before you choose any of them, remember a few guidelines.

Consolidation Loans

While consolidation loans help with loan 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 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.

Companies or Credit Counselors

When enlisting the help of a 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 management programs for you. Unfortunately, this arrangement can be used only if the money 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 services of companies, be sure to first account for the total costs involved for this assistance. If you are in severe debt, you may not have that kind of leisure of choice.
Filing for chapter 7 bankruptcy or chapter 13 bankruptcy may serve as the final debt reduction strategy. But before doing so, make sure that you are completely aware of the after bankruptcy consequences. 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 recur.
Disclaimer: This information is for reference purposes only and does not directly recommend any specific financial course of action.