Turn Your Wasted Money Into a Debt Reduction Plan

Posted by Madison on May 20, 2008

According to some estimates, every household, on average, wastes 15% of its income (if you make $4,000 a month, this amounts to $600). This wasted money disappears into needless things that do not offer any real and lasting value. Things like lattes and money for useless knick-knacks that do nothing more than gather dust. Impulse buys and “great deals” that are “too good to pass up” — even if it isn’t something you need.

What could you be doing with this wasted money instead? Well, if you have debt, you can use it as part of a debt reduction plan.

Aggressive debt reduction is a way of planning to use your wasted money each month in order to get out of debt and then start saving. Here’s how it works:

Step one: What’s your budget?

The first think you need to do is take an honest look at your income and your expenses. How much do you make? What do you spend your money on? Take a couple of months and write down everything you spend your money on. Tedious, I know. But necessary. I keep track of my money using a computer program. It makes things easier to keep track of, and you can categorize things as “snacks” or “unnecessary.”

After keeping track, sit down and go through everything. Do you have any money left over at the end of the month? How much have you been “wasting” on things you don’t need? Figure out which things you don’t need and add that amount up. That is your “waste.”

Write down the amount of money you waste, plus whatever you have left at the end of the month. Now we’re going to take that money and get it to work for you.

Step two: What are your debts?

In the first step, you should also have included minimum payments you make to your creditors. Now, get a list of your debts out, and write down your balances, along with the minimum payments, on a piece of paper. I like to order them smallest debt to largest debt. Be honest.

Your list may be something like this:

  • Credit card: $2,500 Min. $35
  • Credit card: $3,300 Min. $42
  • Car loan: $9,700 Min. $215
  • Private student loan: $11,100 Min. $150

Step three: Take your waste and apply it to your debt

In order for this to work, you will have to change some things about your lifestyle. You have to make a decision to stop wasting your money for this debt reduction plan to work.

Take the amount you wrote down at the end of step one. Take 25% of it and set it aside as savings (preferably in a high-yield savings account). Take the other 75% to use for your debt reduction plan. For example, if that number is $200, your savings amount would be $50 and your debt reduction plan amount is $150. The amount isn’t that important. What is important is that you are planning a lifestyle change.

When you go to make a payment on the first debt, add that $150 to the $35 minimum for a total payment of $185. Keep paying the minimum on all your debts. This will help you get the ball rolling. If you find you can contribute more each month, do so.

After the first debt is paid off, move on to the next. You can see why I like doing the lowest balance first. It is encouraging to pay off a debt, and the smaller one will be paid off faster, in general. Take that entire $185 and apply it to the next debt, so the payments on your second debt would be $227. Pretty soon you’ll be on a role.

And, once your last debt is paid off, take the entire amount and put it into savings each month.

This is a guest post by Miranda Marquit. Miranda is an editor for DestroyDebt, an informational Web site about debt consolidation. She also writes about personal finances on Yielding Wealth.





You can get my latest articles full of valuable tips and other information delivered directly to your email for free simply by entering your email address below. Your address will never be sold or used for spam and you can unsubscribe at any time.

Email:

Comments to Turn Your Wasted Money Into a Debt Reduction Plan

  1. The plan is great and very popular. However, I beg to differ with you on which debt to pay off first.

    It is nice to choose the lowest debt amount first because you would “pay it off faster” and thus feel more confident.

    However, the facts will show that it’s always best to list them, and pay them, by the interest rates/fees rather than by amount.

    I don’t have time right now to give number examples but you can easily look around and see where the benefit is in paying off highest interest rate debts first.

    Now, I’m not saying that EVERYONE should do this because for some people they may need that extra motivation by seeing a more direct result. But, for ultimate, long term benefit, it’s best to pay by interest rate and not by amount. Keep up the great work!

    Joshua

  2. Funny, I also just wrote an article on how to create a budget and use it to get out of debt:

    http://www.dontfeedthealligato.....ing-set-up

    MITBeta @ Don’t Feed the Alligators

  3. There are times I’d be willing to bet that 15% is a low number for me.

    This time of year is especially difficult. Seems that every person in my family has a birthday or is graduating. Add to that my anniversary, my wife’s birthday, vacations, and summer activities and the money drain is enormous!

    Ron@TheWisdomJournal

  4. This is a creative way to boost a debt snowball. I bet most people could eliminate 20-25% of their budget and barely even notice. And this way they would be putting it to good use!

    Frugal Dad

  5. It’s amazing how much money you can find when you start tracking what you’ve been spending. We have recently started a budget and were able to “find” a lot of money simply by cutting back on the wastage.

    Journeyer

  6. Thanks for all the comments! Yes, you will keep more of your money if you order your debts by interest rate, but for some of us, the morale boost is necessary. For me, it’s what kept me encouraged by my progress.

    I agree that this time of year is difficult. The obligations see to add up during the summer — not to mention the family trips and vacations! While it slowed things up a bit, I often cut back a little bit in my debt reduction. But if you do that, you should have the discipline to pick back up when the summer ends…

    Finally, it is amazing how much money you can “find” if you make a list of your expenses and prioritize them to cut out the unnecessary items. Some months, when we go back and see what we’ve spent money on, that waste really is close to 25%!

    Miranda

  7. It is amazing when we each add up how much money we can waste! The problem though is most of us don’t add up how much it is to really know. Getting people to focus on using what would normally be wasted money; redirected to reducing their debt is a good resource for most people to start with!

    Tammara

  8. This is a great strategy and I have heard it called “trimming the fat” by some financial professionals. It works! The acceleration along with focus gets the results. More people need to know about this!

    BLT

  9. I haven’t found anyone who is actually and truly debt free. Even though you have paid off all your (created) debts, there is one debt that will never go away and keeps getting larger if you own your own home. Property and school taxes! I live in eastern PA, and I must save $600 per month so I can pay my combined property/school taxes every year. This number will continue to rise until I die or move away.
    This is based on my house value of about $275,000. How do people who have million dollar homes afford to pay the taxes? Is there a secret???????

    John

Leave a Reply

Your email address will not be published. Required fields are marked *



Previous article: «
Next article: »