10 Steps to reduce personal debt

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10 Steps to reduce personal debt
3 years ago
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Could you be debt-free this year? When millions of Americans are at least $9,000 in debt, achieving financial freedom and a rich, rewarding life may seem like a pipe dream. But debt doesn't have to be debilitating. Using practical yet deliberate steps, you can begin to pay off what you owe, reduce your debt and begin living a rich, debt-free life. These steps will show you how:

1. Know what you owe.
To be able to take control of your money, you should know where it goes. Since a good portion of your income goes to paying off debt, you need to have a clear perspective about the following:

- the type/s of debt you have
- the amount of money you owe
- to whom you owe money
- payment dates and frequency of payments
- interest rates
- why you have these debts
- how long before you pay them off

2. Prioritize your debts.
Determine the importance of one debt in relation to another, then pay off the more important debts first. The money you owe the bank, for example, is relatively more important than the money you owe your mother or your best friend. If you default on payment, the bank will charge you interest while your mother won't. Pay off the debtor who is more likely to increase your debt amount so you don't have to worry about your personal debt ballooning. In the same vein, aim to pay off credit cards with the highest rates first. High interest rates on debt mean more money out of your pocket. If you want to be debt-free and still be able to live a rich life, make paying off your high interest rate credit cards first then pay off the rest. Paying only the minimum on high-rate credit cards will require you to pay more money over the long term.

3. Negotiate for lower interest rates.
If you have long-term personal debt, you will benefit from better interest rates. Inquire with financial institutions you owe money to if your rates can be lowered and then negotiate. If you have credit cards, look for cards with lower interest rates and consider transferring balances from your current high interest cards to those low interest cards. Although most of these card companies will only give you low interests within a limited time, you could take advantage of the offer and pay off your balance more quickly if you have the funds. You can then reduce your personal debt significantly and be debt-free within a shorter time period.

4. Pay off your debts in an aggressive manner.
If you can, pay the full amount of what you owe. If not, pay as much as you can realistically afford. Take for example credit card debts -- if you keep paying the minimum amount each month, you will be carrying the burden imposed on you by compounded interest rates. By simply paying more, you could save hundreds of dollars in interest alone and reduce the total amount of your personal debt within a shorter time.

5. Reduce the number of credit cards you have.
Credit cards are just excuses to spend more. If you don't have them with you the next time you shop, you'll have less capability to pay for your purchase. Make it a goal to cancel some of your credit cards and leave only one or two major ones. Then use these primary cards to pay for your most important purchases.

6. Cash it, don't charge it.
Cash can significantly reduce the amount of your personal debt more quickly than a credit card can. Cash can also help control your expenses by limiting your purchasing power. If you carry only cash, you'll be least likely to be tempted to spend. By paying for purchases with cash, you add nothing to the amount of debt you already have. You will also learn to make intelligent decisions about everything you buy.

If you want to be debt-free and financially free, leave your credit card at home and purchase only on cash basis.

7. Know your real income.
Your real income refers to the amount of money you receive regularly as part of your salary, sales commissions, bonuses and the
like. It's money that's yours to dispose of as you please, after you have paid off your obligations. Your real income does not include your credit card limit or the money on loans you can take out using your ATM, paycheck or a few of your assets. What real income you have, that's how much you should spend for, no more. Recognize your limitations by living below your means. Spending more will only pull you deeper into debt.

8. Respect your budget.
With a good working budget, you have better control over your expenses and a better idea where your money goes. Once you create a budget, learn to honor it. A budget is a surefire way to help create wealth and it's one of the failsafe steps to help you become debt free. With a budget, you can plan for expenses that may otherwise cause you to overextend yourself. A budget also lets you live within your means.

9. Work with your creditors.
Your creditors can be your best allies when you're looking to become debt free. If you're having trouble paying back your loans, negotiate with them. Creditors are much more interested in collecting their money from you and will be appreciative of your efforts. Requesting a negotiation is also an indication that you are an honest borrower who can be trusted.

10. Spend, save and treat debt with your future in mind.
You don't need an epiphany to help you realize that to become debt free and achieve your goal of financial freedom, you have to be mindful of what would happen to you years from now. Be aware of all your financial decisions and actions and be deliberate about the choices you make.
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