Easy Ways To Reduce Your Debt

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Here’s that nasty word again – Debt.  We all fear it and it seems to creep up on us unsuspectingly. Debt can be such a nuisance to us all, so here are some easy ways to reduce your debt.

With these methods it’s important that you have a budget and know what spare income you have first.

Caution: the weather may be a bit frosty.

What Is Debt?

Debt can be defined as an agreement where a debtor (that’s you) pays a value to a creditor (i.e. a bank) in return for capital.

The agreement usually consists of a capital (principal) payment and an interest payment.

I have a quote supposedly from Benjamin Franklin – 

“Tis against some mens principle to pay interest, and seems against others interest to pay the principle.”

This is so true, how many times have you or someone you know only paid back the interest payments each month on your debt rather than paying the capital off?

Well it’s time to change that habit.

Debt Snowball Method  

Here we have a very simple way of paying off debt. 

Take the following steps:

  1. Most crucial is to list all of your debts from smallest to largest.
  2. Make sure you’re paying the minimum payments on all debts.
  3. Determine how much spare money you have each month.
  4. Use all spare money to pay off the smallest debt first.
  5. Once paid move onto the second smallest and so on.
  6. Every time a debt is cleared take the minimum payment from that debt plus your spare capital and put that towards the next debt.
  7. Let it snowball.

This method should really help you stay positive, you’re actually clearing debt. 

The snowball effect of taking the minimum payment from the cleared debt and adding it to the next largest debt can make a huge difference. 

Here’s an example:

Snowman Bob has 5 credit cards with a total of £5000.

First we list them out smallest to largest:

  1. £500
  2. £600
  3. £750
  4. £1250
  5. £1900

Bob’s minimum payment on each card is 3% per month (pm): 

  1. £15pm
  2. £18pm
  3. £22.50pm
  4. £37.50pm
  5. £57pm

In total £150pm.

Bob also has spare £200pm, which he will put into the smallest debt first and snow ball in to each of the larger debts.

Once the small debt is cleared Bob will pay £215 in the 2nd smallest, then £233 into the 3rd, then £255.50 into the 4th, and £293 into the last.

Meaning Bob will pay his debt off in 20 months.

It’s an easy way to see some progress, which will help keep you going.

 

Debt Avalanche Method

This is similar to the snowball method but focusing on debt with the highest interest rates first.

Here’s how:

  1. Most crucial is to list all of your debts from highest interest rate to smallest.
  2. Make sure you’re paying the minimum payments on all debts.
  3. Determine how much spare money you have each month.
  4. Use all spare money to pay off the highest interest rate debt first.
  5. Once paid move onto the second highest and so on.
  6. Every time a debt is cleared take the minimum payment from that debt plus your spare capital and put that towards the next debt.

As you can see we’re taking the focus away from the smallest debt and putting it on the highest interest rate.

Here’s snowman Bob again with his 5 credit cards:

First we list them out highest interest rate to smallest:

  1. £750 & 20% interest 
  2. £1900 & 16% interest 
  3. £1250 & 12% interest 
  4. £500 & 10% interest 
  5. £600 & 8% interest

Bob’s minimum payment on each card is 3% per month (pm): 

  1. £22.50pm
  2. £57pm
  3. £37.50pm
  4. £15pm
  5. £18pm

In total £150pm.

Bob also has spare £200pm, which he will put into the highest interest rate debt first.

Once cleared Bob will pay the minimum payment plus the £200 as before.

The avalanche way means that Bob would clear his debt in 20 months.

Snowball vs Avalanche

Both methods work well and give you a good plan to get your debt cleared and both take roughly the same amount of time. My examples are quite basic but are designed to just give you an indication of what you need to do.

The avalanche method may require more commitment if your higher interest debts are at the top.  If so it will feel like it takes longer to see any impact. The plus is that the sooner the higher interest is cleared the less interest you would have had to pay in total.

The snowball will feel like you’re getting places quicker, which may help with the whole psychology of paying debt off giving you motivation to keep going. It’s easier, but you may end up paying more interest over time and so will be more expensive.

Consider Refinancing

Refinancing your credit cards and loans could save you a significant amount per month.

Start off by looking through your debt agreements and find out what interest rates you’re currently paying. 

The trick here is to replace your existing debt with an alternative credit option that has a 0% interest rate.  

If you have credit cards with a high interest rate then you could balance transfer these to a 0% interest credit card. You can read more on www.moneysavingexpert.com and check whether this option would work for you by using their eligibility calculator.

If you have a loan or overdraft with a high interest rate then you could money transfer to a 0% credit card. You can read more on www.moneysavingexpert.com and check whether this option would work for you by using their eligibility calculator.

Both are new borrowing, and any form of borrowing can be dangerous so please make sure you understand what you’re getting into before agreeing.

Start by transferring your debt with highest interest rate and then set up a direct debit to pay it off.

If you’re able to transfer all your debt to 0% finance then you should use the Snowballing method as a plan to pay it off.