5 Ways To Reduce Debt
It’s safe to say that many Americans have a debt problem. This year, the Federal Reserve reported that Americans collectively carry $995 billion in outstanding credit card – or “revolving” – debt. And those aren’t the only numbers that shed light on our collective financial health.
Seventy five percent of Americans live paycheck to paycheck. More than half have less than $1,000 reserved for emergency purposes. When nearly 70 percent of income goes toward debt and taxes, only 30 percent is left to feed the cost of daily living.
If we’re spending more than we earn, how can we plan for retirement or give back to our communities?
The short answer is: we can’t, without a thoughtful plan.
That’s why taking steps to manage not only your debt, but your spending, is so important. When it comes to debt, we need to control it and work to align it with other financial goals and faith-based values.
Control your debt in 5 ways:
- Attack neglected debt
- Focus your spending
- Create a budget
- Build emergency savings
- Increase your income
Attack Neglected Debt
“The rich rules over the poor, and the borrower is the slave of the lender.” (Proverbs 22:7)
Unpaid credit card bills can quickly escalate in cost thanks to steep interest rates. Prioritize debt payments by focusing on necessities first, like your house and car payments. Then, prioritize other debt payments in order of highest interest rate. Remember to leverage payment plans, especially with medical bills, when they are available.
Focus Your Spending
“Keep your life free from love of money, and be content with what you have.” (Hebrews 13:15)
A recent study showed that 5 in 6 Americans admit to impulse buying. The act of purchasing an item on-the-spot usually means you’re deviating from a budget. Impulse buying ultimately derails you from reaching financial goals. When you make intentional spending decisions, you’ll notice a reduction in overall spending – freeing up more cash to pay down debt. When you feel compelled to make a purchase decision spontaneously, just remember: If you can afford to buy it, you can also afford to save it. Sleep on it. Take time to think about the purchase. Put the item on hold for 24 hours. Make the purchase if it fits with your financial goals and values.
Create A Budget
“For which of you, desiring to build a tower, does not first sit down and count the cost...?” (Luke 14:28)
Most of us don’t truly know where our money goes. Think about the financial milestones that you want to reach in the near and far-term. List monthly needs and prioritize credit card payments. Use a budget tool to help align spending with goals and begin to make thoughtful, intentional decisions about money.
Build Emergency Savings
“Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.” (Proverbs 21:20)
How financially prepared are you for an emergency? Start small and set a goal to save $1,000. Then you can work up to 4 to 6 months of income to cover an unexpected event. That way, when a costly event surprises you, you can turn to stored cash instead of credit cards. Set a reasonable savings goal, determine where you’re going to keep the money, consider setting up automatic transfers and stay true to the reserve’s purpose – for emergencies only!
Increase Your Income
“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” (Proverbs 13:11)
Finding ways to make more money on top of your already-busy schedule may seem impossible. Just remember, lenders care about your debt-to-income (DTI) ratio. Your DTI is a percentage calculated by dividing your monthly gross income with your monthly debt payments. To improve (and lower) this ratio, you should try to increase your income and decrease your debt. To generate extra income sources, you can:
- Add a sideline job like tutoring, driving or freelancing
- Adjust tax withholdings
- Negotiate for higher pay
- Develop barter jobs like childcare and carpooling