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Debt reduction
Designing a debt reduction program
can be the best way to solving your financial crisis when you are
in a lot of debt. Debt and the interest rates attached to each debt
makes the balance increase at fast rate. This is especially
true when you either pay only the monthly minimum. If you ever want
to become debt free a debt reduction program is critical to make
debts disappear. But taking out a debt reduction consolidation loan
to cover the entire amount of your debts may be out of the question.
First, you need to take some time to honestly assess your financial
position.
To create your own debt reduction program, make a
list of all the debts you have together with their minimum monthly
payment. Then make a list of all the monthly expenses you have each
month.
Remember to include your utilities,
grocery bills, subscriptions, insurances plus allowances for clothing,
gifts, travel, entertainment, gas etc. Add the monthly minimum payment
for all of your existing debts to this amount and then take it from
the total amount of your income. Any money remaining is the
disposable income you can use to get yourself out of debt. Now that
you know your present financial position, the way to reduce your
debt is to make your disposable income work best for you. Take a
look at your debts. Which ones are the smallest? Which ones have
the highest rates of interest? Which ones are for fixed terms and
which ones will go on forever if you do nothing more than pay the
minimum monthly payment? Take out any which are fixed period debts
over a pre-determined period of time. This usually means the interest
was pre-calculated and added to the cost of the item.
You pay the same amount every month for the 6, 12,
24 or 36 months it takes to clear the debt. Leave these debts until
last because you will gain more by using the extra income to increase
the monthly payments on less fixed debts which have variable interest
rates. Take the debts which are for the lowest amounts and use your
disposable income to increase these monthly payments first. Either
put all of the extra money onto one debt to pay it off quicker,
or spread it out over a few of them. Once you have paid off one
debt, whether because the term of the fixed period loan is complete,
or because you have cleared an open-ended debt such as store or
credit card debt, use the money that you save to increase the monthly
payments on your other debts.
This creates a debt reduction snowball and over time
you start to see more debts disappearing and freeing up more money
to pay the larger debts off quicker.
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