Falling behind on your loan payments or on your credit card can leave you feeling very powerless, but when you have some debt reduction tips or by buying good budgeting habits, you can be able to come out of your debt and become financially free. In this article, we will discuss two methods to plan the debt reduction strategy. These methods will help you on how to manage your debts as well as creating a debt reduction plan.
Free Templates
A debt reduction worksheet is a powerful tool that can assist you in managing your financial obligations and achieving your goal of becoming debt-free. By using a pre-built template, you can streamline the process and gain several technical benefits. Our professionally designed templates offer simplicity, organization, and accuracy, allowing you to track your debts effectively. Best of all, these templates are available for free download, making it easier for you to take control of your finances and embark on your debt-reduction journey.
Method 1: Snowball Debt Reduction
A debt reduction snowball is one of the best ways to handle your debt. This snowball technique by Dave Ramsey will pay your bill in an increasing order regardless of the interest rates. What is interesting is that this method is more than paying your bills since it changes your behavior with money and will ensure you will never be in debt again.
The method pushes you into a situation where you will stay intentional in paying your bills one after another until you will be debt-free. A debt reduction plan is very beneficial since
- It will reduce the stress in your daily activities.
- You will be able to boost your credit score.
- You can increase your future earnings.
- When you pay your debts, you teach your kids good money habits.
When using the snowball method, you will pay your bills, and you will get a mentality that you are the boss of your money. Not the debt.
Below are the steps of how the Snowball method works
Write down your debts, starting from the smallest to the largest.
Your small debts will have small interest rates; hence there is a need to start with them since this will not be frustrating, and with time, you will get the motivation to pay your larger debts. For instance,
| DEBTS | TOTAL PAYOFF | MIN.PAYMENT |
| Diagnostic | 65 | 15 |
| Medical Bill | 450 | 50 |
| Home Appliances | 750 | 50 |
| Total | 1280 | 115 |
Start from the smallest
| DEBTS | TOTAL PAYOFF | MIN.PAYMENT | NEW PAYMENT |
| Diagnostic | 65 | 15 | 15 |
| Medical Bill | 450 | 50 | 50 + 15 = 65 |
| Home Appliances | 750 | 50 |
Make small payments on all your debts apart from the smallest where you are required to throw huge amounts at once so that you can clear them much hastily. The moment that debt has been cleared, use that payment for your next smaller debt while at the same time continuing to make small payments on the rest of the debts.
| DEBTS | TOTAL PAYOFF | MIN.PAYMENT | NEW PAYMENT |
| Diagnostic | 65 | 15 | 15 |
| Medical Bill | 450 | 50 | 50 + 15 = 65 |
| Home Appliances | 750 | 50 | 65 + 50 = 115 |
Go till end, like a snowball
Ensure you are following this method in all your debt reduction plans. It is good to know that the more you are paying your money, your freed-money is growing just like a snowball that is rolling downhill.
Continue this process until you are debt-free.
Method 2: Use Worksheets
It is quite challenging to design a plan that you will use to pay off debts, especially if you do not have a background about finances. Working with spreadsheets and templates will simplify this task hence easier to make a plan to pay off your debt. Templates are unique and versatile and can be used with open office calculations Microsoft Excel and Google Sheets. These templates have formulas to do your calculations and all your maths.
Tips to Reducing your Debt
People use different ways to reduce their debts. These are some ten ways you can use to reduce your debts.
Avoid Creating More Debt: This strategy will not get you out of debt but ensures your debts are not deteriorating. You can reduce your temptation to create more debt, for example, by freezing your credit.
Increase Your Monthly Payment: If you are paying just a small amount on your debts, it will take a longer time to get out of your debts. Paying your debts with the minimum payments will prolong the payment period, and by the time you finish your debt, most probably, you will have paid double the original charge. For example, make the minimum payment on your credit cards if you have a debt- repayment strategy that will require you to make huge payments on your credit cards.
Create an Emergency Fund: An emergency fund can keep you from creating more debt by giving you a safety net that you can use instead of a credit card in case an emergency appears. For example, you can set aside an emergency fund for six to twelve months for your living expenses and, at the same time, build up at least 1000 dollars in the short-term.
Pick a Debt to Give all You Got: A good example is to make ideal progress by throwing huge payments to one of your debts until this debt is fully repaid then make the minimum on all your accounts. After that, do the same to another debt until your debt has been fully repaid.
Request Your Creditor For a Lower Interest Rate: The higher interest rate will result in longer debts because most of your payment will go towards the monthly interest and not the principal debt. For instance, you can ask a debtor to reduce interest rates.
Find Ways To Add More Money To Your Debts: The more money you put towards your debt, the faster you will get your debt cleared. For example, you can come up with the money to pay your debt by selling your asset or generate income from your hobby.
In conclusion, it is very important to clear your debts since you will leave a stress free life. Following the snowball method ensures you don’t fall into the debt trap again.
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