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Now that you know where you stand financially your next step is to make a plan for debt reduction. The easiest way to do this is to use the information you created in steps 1 and 2 to make the following table. This means you will need to subtract from your net income your minimum debt payments from step 1 and your monthly expenses from step 2. What's left over is what you can use to pay off your debt.
Example Your plan
Monthly income after taxes $3800 $ ________
Minimum debt payments $1700 $ $ ________
Monthly expenses $600 $ ________
Amount remaining to be used
to pay off the debt with the highest
interest rate and balance = $1500 $ ________
Continue focusing on first paying off your most expensive debt then move on to the next one that has the highest rate and balance. Make sure you don't add on any new charges to your credit cards. And try to find ways every month to increase the amount you pay towards your most expensive debt.
4. Begin negotiations
While you’re beginning to implement your debt reduction plan from Step 3 start you should be negotiating with your credit card companies. Try to get your interest rates reduced or to negotiate a settlement for less than you owe.
Folllowing is a video with financial guru Dave Ramsey explaining more about DIY debt settlement.
You should find it really easy to negotiate the terms of any debts that have been charged off by a lender or that are already in collections. You might also consider transferring some of your credit card debts to a new one that has a lower interest rate. It would be even better if you could qualify for one of the 0% interest balance transfer cards where you could have as many 18 months’ interest free. This would save you a lot of money in interest charges. Do make sure that you keep the balances on your credit cards below 30% of your credit limits. This is because if it gets above 30% this will damage your credit score. This would also be a good time to investigate a debt consolidation loan.
5. Stick to your debt reduction plan
It's important that you do your best to meet your goals for repaying your debts every month. It’s okay if the amount varies that you put towards your most expensive debt each month. However, you need to try to put as much possible towards your debts on a consistent basis. The simplest way to do this is to sign up for an automated payment system. Then put a chart on your refrigerator showing your progress. This can help you stay on track. And be sure to celebrate your successes when you reach major milestones. Do this and before you know it you'll be debt free.
Most Frequently Asked Questions about debt reduction
Q. What is the snowball debt reduction plan?
A. The snowball debt reduction plan was developed by financial guru Dave Ramsey. The way it works is that you list your debts in order from the one that has the lowest balance down to the one with the highest and then focus all your efforts on paying off the debt with the lowest balance, while making at least the minimum payments on your other debts. Once you get that first debt paid off you then move on to the one with the second lowest balance and so forth. The idea behind this plan is that paying off the debt with the lowest balance will be relatively easy and will give you the momentum necessary to begin paying off the second debt and then on to the third and so forth.
Q. How to create a debt reduction plan in Excel?
A. Creating a debt reduction plan in Excel is relatively simple. You first create a spreadsheet with four columns in the top row as illustrated in step 1 then go down a row and begin filling in the appropriate information. You could then you use Excel's formulas to play "what if" games or to reorder your debts using the snowball method
Q. How to accelerate debt reduction?
A. There is no secret to accelerating debt reduction. All you need to do is increase the amount you pay on your debts each month per the table shown in step 3. For example, you might be able to increase the amount to be used to pay off your debt by reducing your living expenses so that you have more money available for debt reduction.
Q. How do debt reduction services work?
A. Most debt reduction services are actually debt settlement companies. If you choose to work with one of these companies, you'll stop paying your lenders. You'll transfer a set amount each month instead to an escrow type account. Once enough money has accumulated in your account to settle one of your debts the settlement company will contact you and ask you to release enough money from your account to cover it. This process will continue until all of your debts have been repaid, which typically takes from 24 to 48 months.
Q. Are debt reduction companies legitimate?
A. There is definitely legitimate debt reduction (settlement) companies. They are the ones that charge no upfront fees and that make no grandiose promises. Most of them do not collect their fees until they have settled all of your debts, which serves as a 100% satisfaction guarantee as you could drop out of your program at any time and without it costing you a cent.