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Steps You Can Take to Reduce Debt
By Ann C. House
Extension Assistant Professor, Utah State University
Utah Saves Campaign Coordinator
 Do you avoid opening your bills? Are you forced to use credit to purchase gas, groceries and other necessities? We all experience financial stresses at certain times in our lives. This has become especially true as our national and personal debt increases while there doesn't seem to be an immediate cure to the current economic crisis.
We can become focused on fears of job loss, home foreclosures, inability to obtain loans and paying higher interest rates. But we need to be able to manage our jobs, our personal life and our stress. One thing that can help is to take control of our finances by taking steps to reduce personal debt.
Step One: Evaluate where you are
Take stock in where you are right now. Don't be afraid to look at your debt. Knowledge is power. Gather all your financial papers. Write down the balances, interest rates and monthly payments due on each debt; include credit cards, auto payments, medical bills and student loans. It's not necessary to include a mortgage in this exercise as it is a long-term loan, likely with a relatively low APR. It is better to focus on paying off bills and short-term debt at this time. Take note of fees you are paying on credit cards. Since many cards don't charge fees, you may want to look into switching to this type.
Order a free copy of your credit reports through Annual Credit Report. Correct the errors and inaccuracies and do what you need to do to improve your credit report. Go to www.ftc.gov to find out more.
Now that you have these numbers, calculate the debt-to-income ratio to know if you are overspending. Total the consumer debt balances. Don't include mortgage/rent/utilities or other continuing expenses. Next, divide the total consumer debt into monthly take-home pay. Finally, change this number to a percentage. (Example: total monthly consumer debt = $730, monthly take home pay = $3,300, so 730/3,300 = .22 or 22 percent). What does this percentage of debt tell?
· Under 15 percent = Comfortable
· 15 to 20 percent = Caution
· Over 20 percent = Take action to reduce debts
Step Two: Negotiate
Contact lenders to see if you can improve your loan terms. You may be able to negotiate a lower interest rate on credit cards. Call medical creditors to let them know you are aware that you owe them and negotiate a set amount that you are able to pay each month. Consider moving the credit card balance to a card with a 0 percent introductory rate. Be sure to keep track of the terms so you don't pay a higher interest rate than before when the rate goes back up. Also be mindful of fees involved. Free balance transfers are harder to find than they used to be.
Step Three: Go to www.powerpay.org
Now that you have organized debt and negotiated for reduced or improved loan terms, you are ready to start paying off debt. Use PowerPay. This free, interactive calculator will help you save interest and become debt-free more quickly by using the power payment principle for paying off debt. The simple key to this principle is to add the money once used to pay off one debt onto a second debt when the first is repaid.
Input your loan balances, interest rates and monthly payments. There are several choices you can make to calculate the repayment schedule, with paying the highest interest rate first usually saving you the most money. Print the payment schedule and tape it wherever you pay bills each month.
Step Four: Follow through
Try to be as consistent as possible in paying off debts. Develop a good spending plan. Search the Internet for a free budget planner that works for you. This can be a worksheet or an online calculator. In a small spiral-bound notebook, track expenses to find out where your money is going. For example, are you buying lunch every day at the office or visiting the vending machines often? Find places to cut back, and put this money toward your debt. Sign up for automated payments and automated savings at your financial institution. This makes it easy to save money and to pay bills on time.
Finding ways to cut back on your spending is disheartening, at best. Most of us believe that we are careful on our spending and that we can't stretch our dollars any further. Jean Chatzky the author of "The Ten Commandments of Financial Happiness" says that we can control much of our money, and that we choose how much debt we take on. She also states that the more control you have, the less money you need to live and be content. (p.68)
Smartmoney.com is a good place to start learning about how to cut expenses. Reducing monthly expenses and saving more money is the must-make resolution for 2009, according to their website. On their site you can find ways to save on cell phones, credit cards, entertainment, gas, groceries, insurance, and utilities.
You will also need to find a good spending plan to suit your needs. Spending plans, or budgets, tell your money where to go instead of wondering where it went! Free spending plans can be found on-line. Some good ones are:
·https://powerpay.org/spendingplan/
·http://extfcs.sdstate.edu/financeext/file/2008SpendingPlanWorksheet.pdf
·http://www.mastercard.com/us/wce/PDF/10144_MAS065_Income_Expense.pdf
Step Five: Make financial plans by writing down goals
Research conducted on the Yale graduating class in 1952 showed that 3 percent had PUT IN WRITING their financial goals. Twenty years later, these same researchers looked up the class and found that the 3 percent who had put down their financial goals were worth more than the 97 percent combined.
Goals are wishes with a deadline. Write down your goals and review them often. Goals become a line item in your spending plan. A realistic goal is SMART.
Specific - Set clear goals for everything you need, for example, new tires for the car.
Measurable - Determine the amount you need and how often to save that amount toward your goal. If you need $400 for tires, you will set a goal at $40 a month for 10 months.
Attainable - Make sure goals are reasonable and possible. Is $40 a month attainable?
Relevant - Make sure your goals are important to you.
Do they reflect your values?
Time-related - All financial goals have a target date. Once you have saved for the tires, you can then allocate the $40 toward another goal.
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