Learn What Financial Advisors Recomend Most For Debt Reduction


Debt reduction takes time, effort and discipline
. It involves changing habits that have lead to accumulating debt in the first place. The person must be resolved to eliminating bad spending habits and developing financial discipline that will lead to paying off debts and staying out of debt. Financial advisors recommend the following step by step plan for debt reduction.

The first thing to do is to balance your cash flow. That means making sure you are not spending more than you are bringing in. This will require establishing a budget and eliminating all unnecessary spending. Write down all of your income sources on a monthly basis and total them up. The write down everything you spend in a month, item by item, and add them up. Compare the two figures to determine if you spend more than you earn. If you spend more than you earn your debt will continue to build until you reduce spending to a level less than what you earn.

Go through the list of spending items and determine which items you can live without. Eliminate every item that is not absolutely necessary for you to maintain your housing, transportation, job, health and current debt obligations. The items that are left will become the core of your budget. If the items that are left are still more than your income then you must find additional income through a part time job to make up the difference. Once you have balanced your cash flow and established a core budget of living expenses you begin to work on eliminating debts.

Make a list of all debts and include the creditor, amount owed, interest rate, and monthly payment. Total the monthly payment column to determine the amount paid out each month on the debts. Group the debts as short term (less than six months to pay off), intermediate term (seven months to 60 months to pay off) and long term (more than sixty months to pay off). By working on paying off the short term debts as quickly as possible, you will boost your credit score and free up cash flow. Some people may be able to get a debt consolidation loan, an equity loan on their house or use interest free credit card offers to consolidate debt and reduce interest payments, but unless you go through the initial steps to get control of your spending and establish a budget, chances are you will end up in worse shape than before, because you will continue to accumulate debt. Consolidating debts is a good thing if discipline is used and the freed up cash is used to accelerate payment of the debts.

As short term debts are paid off take the amount used and apply it to the next shortest debt, until all of the short term debts are paid. Then take half of the money that was applied each month to short term debts and use it to establish an emergency fund bank account and apply the other half to the shortest term intermediate debt. Continue the process of building up the payments as each debt is paid until all intermediate debts are paid, then take half the amount put toward intermediate debts and contribute it to your savings and apply the other half to long term debt payments. Continue this process until all debts are paid off.

By following this process you will be in a solid financial position in the shortest amount of time and by continuing to exercise financial discipline you will have a sound financial future.