Updated May 6, 2011

How to Reduce Consumer Debt Efficiently

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Consumer debt is simply debt that consumers like us owe. It’s not all necessarily a horrible thing, but too much consumer debt can drown you – financially and even emotionally. If you’re struggling with a load of debt and don’t know what to do, take these steps to reduce your consumer debt:

The National Debt Clock
The National Debt Clock © Kevin Krejci

  1. Compile a list of your debts. It’s tough to look at all the money you owe, but getting a realistic picture of your debt is absolutely essential. Otherwise, you’ll just be aiming for an approximate goal. For each debt, you need to list the total amount owed, the interest rate, the minimum payment for each month, and the payment due date.

  2. Make a budget. Next, you need to set aside your list of debts and make a list of monthly income and expenses. This is easy if you’re salaried or have a fairly steady income. If you don’t have a steady income, list your expenses in order of importance. When money comes in, take care of the most important things – your home, utilities, food, car payment, etc. – first. Make sure you incorporate all your expenses into this list and don’t leave anything essential out.

  3. Look at your actual spending. Now that you’ve made your ideal budget, look over your receipts or bank statements for the past few months. What have you actually been spending on groceries, eating out, clothes, and the like? You may find that your budget is unrealistic, so you can adjust it. As long as your budgeted spending is less than your income, you’ll be fine.

  4. Start living on your budget. Living on a budget means tracking your income and expenses every week. Spend a few minutes each week tracking your spending so you can stay on track. There are lots of great online and computer programs that help you track spending automatically. Some even synch with your bank account so you don’t have to transfer information on your own!

  5. Adjust your budget. For a few months, you’re not going to worry too much about paying off extra debt. Just include the minimum payments for all your debts into your budget, and start living on your budget. Within about three months, you should have it adjusted to where it works for you. This probably means cutting back, especially if much of your consumer debt is credit card debt you’ve racked up with reckless spending. By cutting out non-essential items, you’ll be more comfortable with your finances, so the sacrifices will be worth your while!

  6. Pay down your debts. This is just as simple as paying more than your minimum payment with each and every payment you make. Don’t try to spread yourself too thin, though, by paying extra on all your payments. Instead, sock all your extra cash toward the first debt on your list – the one with the highest interest rate. You may also want to start with the smallest debt, but either way, putting lots of money toward one thing is a good idea. Once you pay off the first debt, use your extra money plus the original minimum payment for that debt to add to the minimum payment for the second debt. By the time you get to the last debt, your monthly payments will be huge, but the debt will be smaller because you’ve continued to make minimum payments all this time!

  7. Put any extra money toward your debts. Any time you get extra money for a holiday or from a garage sale, consider putting it toward your debts rather than blowing it. You’d be surprised how quickly a few hundred dollars here and there will help. Plus, once you get out of debt, you’ll have so much extra money in your monthly budget that you’ll be able to do practically anything you want!

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