Debt Reduction

Debt reduction is a critical step on the road to financial freedom.

It consists of freeing up money from creating a sound budget.

Then use that money to pay down your debts through debt consolidation or other forms of debt relief.

Freed up money accelerates debt reduction significantly.

Note: There is excellent budgeting software to help organize your debts and free up monies. If you haven’t done this type of analysis before, the software is a great way to go. See financial resources for more information.

If you are comfortable with a doing your own debt reduction you can set up your own spreadsheet. Below is a simple example to show how this is done.
Copy into the spreadsheet:

• Your creditors.
• The balance of each debt.
• The interest of each debt.
• The minimum payment.
• The months to pay off the each loan.
• The total amount paid in debt payment and interest.
• The total interest paid.

See the example below for a family that has some credit card and other debt.


Debt Reduction Minimum Payment


Take special notice that many of the credit card and finance companies will publish a small minimum payment. If you pay the minimum payment it will take many years to pay off your loans. If you add more debt to these loans (which is normal) it will take even longer. Notice some of the debts in this example are 60 months or more!

Use the widget below to determine your monthly loan payments. The is for auto loans, but can be used for any type of loan. Experiment all you want on reducing your loan duration and savings.


Auto Loan Calculator


Paying More than the Minimum Each Month
By adding freed up money from your budget your loans will be paid off much sooner. In the example below the number of months to pay off several of the loan drops significantly.

Notice that by increasing the total loan payment by only 21% this family would save over $1,600 in interest and would be completely out of debt in 48 months instead of 72 months.

As each debt (with shorter terms) is paid off more money is freed up. This money can be used to accelerate the payments of the other debts. There is a wonderful financial snowball effect from this process. It starts slow, but picks up speed over time (as long as the new budget is adhered to).

In other words, once this family pays off their 24 month debts, they could put this money towards the other debts and pay them down even faster, saving even more in interest payments.


Debt Reduction Added Payment


The Effects of Adding Even More to your Minimum Payment
Adding even more to the minimum monthly payment increases loan retirement speed.

In the final example, additional money to pay down the loan is approximately 50% more than the minimum payments. This family would save over $2,640 in interest (45% interest savings) and would be completely out of debt in 36 months (half the time) instead of 72 months. Not Bad!


Debt Reduction Added Payment1


Final Thoughts on Debt Reduction
These examples have hopefully sparked some ideas on how to speed up debt retirement and put more money in your pocket. If you can’t afford 50% more or even 20% start with 10-15% more—anything helps.

Debt reduction is a great way to take charge of your financial planning and move towards a strong financial future. The credit card and financial companies do not have your best interests in mind. That is your job.

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