Money Matters - Simplified

Planning to Reduce Your Debt? Get Practical

Stuck in debt? Want to reduce the amount of money you owe? Here is a practical guide on budgeting and making best use of your monthly income.
Simply overpay the debt with the highest interest rate, and once that debt is gone, start overpaying the next-highest.

If you are determined to reduce your debt and are serious about this, it pays to get practical. Look at your budget and figure out exactly how you can make the best use of your monthly income.

Here are some practical ways of cutting down debt:

Shun Credit Cards
Say you've got four credit card debts. How do you get that down to three, to two, to one, to zero? Start by taking a look at the interest rates. Find the one that's costing you the most per dollar and focus on getting rid of that one.

If you're not sure how it all works, get some debt advice. It'll set you on the right path, so you can make sure you're targeting your efforts as effectively as possible.

The trick is to put all available money towards that debt. Just pay the minimum towards your other debts, and overpay that credit card by as much as you can afford.

Determine Amount to Pay off Debt
It's up to you how much of your 'spare' cash you want to put towards this. Some people prefer to cut their spending to an absolute minimum so they can put as much as possible towards that debt.

Others prefer to 'sacrifice' 50 percent (or less) of their spare cash, which means that it'll take them longer to clear that debt, but also that they'll still have some money for spending on non-essentials (also known as luxuries).

Again, if you're not sure about what's 'essential', what isn't, and where you could cut back on your spending so you can repay your debts faster, get some debt advice.

It's up to you exactly how you overpay. Just ask yourself:
.how much do I want to get out of debt?
.how many sacrifices am I prepared to make?

Would I rather:
.cut back on everything for a relatively short time, or
.cut back less - but for longer?

Focus on Interest Rate
The simplest (and cheapest) way of looking at overpaying your debts is to focus on the actual cost, the interest you're charged.

Simply overpay the debt with the highest interest rate, and once that debt is gone, start overpaying the next-highest.

However, not everyone works that way. Say the debt on one of your cards is significantly lower than on the others.

Even if it's not the cheapest, you might still decide to focus on that one first. It might not be the cheapest way (remember the interest factor), but the psychological impact of clearing a debt altogether can really give you the kind of morale boost you need when you're working on a demanding but worthwhile project like this.

Whichever way you do it, here's something encouraging to keep in mind. Once you've gotten rid of a debt altogether, that's one less debt to worry about. In other words, your actual required payments will go down, which means you'll have that bit more to use to overpay your remaining debts.

And finally, if you're really determined to reduce your debts, don't underestimate how much the right debt advice can help you, and make sure you don't take on more debt while you're working on your repaying your current debts.

This story was originally published on 2010-10-02.