Do It Yourself Debt Reduction Plan

There are many ways to get yourself out of debt, from credit counseling to debt management plans to debt settlement or even filing bankruptcy. What many people overlook is what should be your first attempt to getting out of debt – a do it yourself debt reduction plan! Here’s how:

Step One: Make a List and Check it Twice

No, you’re not turning into Santa Clause. The first step to getting out of debt is knowing just how bad (or reasonable) your financial situation is. Make a list (paper and pen or a spreadsheet) of all your monthly expenses and debt repayments. For debts that can be paid off, include the current balance owed, the interest rate you’re paying, and amount of your minimum payment. For any expense obligations which are not paid monthly, translate the expense into what it would cost if you paid it on a monthly basis – for example, if you pay your taxes once per year, take the total amount you pay and divide it by 12 to get the monthly obligation.

Step Two: Your Income

Write down your average monthly income. If you’re on a salary this should be as easy as writing down how much you earn every pay period and adding it up so you see what you make per month. If you’re self employed, receive variable income, or commissions, overtime or bonuses, try to figure out what the average monthly income is by adding together the last three to six months of income and dividing by that number of months. If you earned $8,500 in the last three months, divide it by 3 and you’ll see you average $2833 per month.

Step Three: Hold Your Breath and Analyze

Does the amount of your monthly income cover all of the expenses from step one? If not, you need to first take steps to reduce your expenses. Cancel or reduce your cable bill, cancel or reduce cell phone plans, sell your car for one without a car payment, etc. You can’t move on to the next step until your monthly expenses are LESS than you earn each month or any budgeting you do will fail.

If your income is more than your monthly expenses, you should set up a high interest savings account, so you can earn interest on money you set aside until it’s needed.

Step Four: Plan Your Debt Reduction Strategy

Figure out how much money you have left over each month after you pay your necessary living expenses (your house payment or rent, utilities, insurance, groceries, etc). Send the minimum payment to all of your debt accounts except for the one with the highest interest rate. To the debt charging the most amount of interest, you’ll send as much money as you can afford (basically, everything left over from your income that isn’t used to pay the other expenses on the list).

Do this month after month until your highest interest debt is paid off. Don’t give up! When it’s paid off, you’ll add the money you had been sending to that account to the next highest interest account on your list, and continue until all of your debts are paid off.