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4 Steps to Cutting Your Personal Debt

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Personal debt has long had a stigma and for good reason: owing money to credit card companies, lenders and other businesses leaves you saddled with required payments for the indefinite future, and on top of that, you'll pay compounded interest that end up totaling many times more than what you originally borrowed.

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The average American household's credit card debt alone in 2016 was more than $16,000 - a number that balloons every year and prevents millions from building the financially stable life they desire.

While there are forms of good debt, too (think mortgages), but most personal debt is something that should be paid off as soon as possible. Making minimum payments , month after month, might seem like a reasonable way to salve your financial pain, but there are much better ways to approach your existing debt.

Step 1: Prevent Any Further Accumulation

Your first job is to stop yourself from accumulating any new debt.

Reserve your credit cards only for emergencies; if you have trouble maintaining self-control, consider paying only cash for your goods and services. The tangible feeling of parting with cash makes consumers spend less - plus, you'll be less tempted to use your credit card.

Of course, you may be in a tight financial situation that forces you to use your credit card to get by; fortunately, the next three steps on this list will help you through these circumstances.

Step 2: Make a Budget and Prioritize Debt

Next, make a personal budget. If you haven't made a budget before, you can find a basic template online to help you create a framework. Make a list of all the income sources you can count on, and start allocating that income to three different expense categories:

  • Regular, necessary expenses. These are things like your rent, utilities, groceries, and fuel, which you need to survive and must pay on a consistent basis. Some of these are fixed and some are variable, so do your best estimating your average monthly total here.
  • Irregular, necessary expenses. Irregular but necessary expenses are things you need to pay predictably, but not every month, such as payments for doctor visits or car repairs. Set aside some money every month for these expenses, so you're ready when they occur.
  • Unnecessary expenses. These expenses are not needed or easily substituted with a lower cost option, and may include going out to eat and other forms of entertainment.

In addition to these sources, you should allocate as much money as possible to paying down your debt each month. Take care of your necessary expenses first, then your outstanding debt, and only then should you start budgeting to allow for unnecessary expenses.

Step 3: Cut Any Unnecessary Costs

If you're still struggling to find enough money to pay down your debt quickly, work on cutting out your unnecessary costs . For example, you could save nearly $9,500 every year by relying on public transportation rather than a personal vehicle.

If it isn't a necessary expense, it can be cut in some way - and even some necessary expenses can oftentimes be reduced.

Step 4: Increase Your Income

If you want to pay off your debts even faster, your best bet is to secure an additional source of income. For some, that may mean picking up a second (or third job) and working more hours. For others, that might mean opening up a side business , such as selling crafts online or doing freelance photography. In any case, even a few hundred extra dollars of revenue a month could give you enough of a cushion to get a handle on your ongoing debts.

Follow Up: Saving and Investing

Even once your debts are eliminated - or at least paid down to a reasonable level - you've still got work to do. You need to set yourself up for the future, preparing for emergencies so you don't have to build up new debt in response to unfortunate circumstances, and building wealth to ensure a more comfortable lifestyle for yourself.

Take at least some of the money you were using to pay down your debts and start squirreling it away into an emergency fund, or consider investing in stocks to earn a better interest rate on your capital.

With a solid framework in place, you'll be financially liberated and far more capable of reaching your long-term goals. You don't need to be afraid of debt - in fact, accumulating and paying debts is one of the best ways to improve your credit score - but you need to be in control of the situation.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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