Five practical steps to reduce debt and keep it that way
Many people find themselves caught in a cycle of borrowing, where one debt gets paid off only for another to take its place. Whether it’s credit cards or loans, you might feel like you’re constantly treading water.
The good news is, with the right approach, you can reduce your debt and keep it under control. Here are some practical steps that can make a real difference in your finances.
Take stock of what you owe
The first step in tackling debt is to get a clear picture of your situation. It’s easy to lose track of different balances, especially if you have several different payments going out each month. But oversight is so important to start with.
Start by listing all your debts, including the amount, interest rate and minimum monthly payment. Once you have everything laid out, you’ll see exactly where your money is going. This might be a wake-up call, but it’s also a crucial first step towards making things better. You’ll need this information to create a plan that works for you.
Focus on high-interest debts first
Not all debts are the same. Some, like credit card balances or payday loans, have much higher interest rates than others. This means they end up costing you far more over time, so the sooner you clear them, the better.
By focusing on paying off these types first, you’ll make more of a dent in what you owe. Start by making the minimum payments on everything else, but use any extra money to pay off the debt with the highest interest rate. Once it’s cleared, move on to the next one.
Consider combining your debts
If you’re finding it hard to keep track of multiple payments, debt consolidation might be worth exploring. Debt consolidation lenders can help simplify your finances by rolling several debts into one manageable payment. They could even help you spread the cost over a term that suits you better.
It’s important to make sure the new loan offers the same, if not better, terms as your current agreements. A lower interest rate or extended loan term could reduce your monthly payments, but check for any hidden fees that might offset the benefits.
Create a budget and stick to it
Budgeting is at the centre of the process if you’re looking to get your finances back on track. Start by tracking your income and outgoings for a month, so you know roughly where your money is heading. Once you have a clear picture, you can prioritise your spending and set realistic limits.
The goal is to free up as much money as possible for debt repayment without putting yourself in more financial trouble. Be honest with yourself about your lifestyle choices – small changes, like cooking more meals at home or cutting back on non-essential purchases, can have a big impact over time.
Build an emergency fund
Once you’ve paid off your debts, or are at least on the way to doing so, it’s time to think about the future. Building a pot of emergency savings, even a small one, should help you avoid falling back into debt when unexpected costs arise.
A good rule of thumb is to aim for a few months’ worth of living expenses, but whatever you can gather is better than nothing. Start by putting aside a small amount each month.
Once you’ve paid everything off, consider using the money you were allocating to repaying debts to build your emergency fund instead. A nice cushion should give you peace of mind and help you stay debt-free in the long run.